Study: Recent trends in the Canadian lumber industry

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Canada's lumber industry has undergone extensive restructuring, and has remained profitable despite the impact of various trade and economic pressures during recent years, a new study has found.

The study, published today in the Analysis in Brief series, reveals that the industry has lost thousands of jobs since the turn of the millennium. However, it has intensified its restructuring, resulting in substantial gains in labour productivity.

These gains, combined with a brief but large surge in lumber prices and operating revenues in 2004, have helped the industry maintain positive profit margins comparable, on average, to those reported in the manufacturing sector from 1999 to 2005.

Among the challenges faced by the industry during this period were the Canada/United States Softwood Lumber Agreement (1996 to 2001); the American anti-dumping and countervailing duties imposed on the industry from 2002 to 2006; rising energy and raw material prices; declining lumber prices and a higher exchange rate for the Canadian dollar.

During most of the five-year Canada/United States Softwood Lumber Agreement, production and jobs rose more or less steadily. However, the total number of hours worked in the industry declined as the number and length of work shifts fell. This resulted in a rate of growth in labour productivity that was double the average for the manufacturing sector from 1997 to 2001.

The lumber industry is an important player in Canada's economy. In 2006, it contributed $7.6 billion to Canada's gross domestic product (GDP). This represented 4.4% of the manufacturing sector and 0.7% of the overall Canadian GDP. The industry is also a key player in export markets, accounting for more than 4% of Canada's total merchandise exports.

Turning point for the industry in 2002

With the end of the Canada/United States Softwood Lumber Agreement in 2001, the United States began imposing anti-dumping and countervailing duties on the Canadian lumber industry in 2002. This marked a turning point for the industry in terms of shipments, jobs, labour productivity and exports.

While production volume kept rising more or less steadily until 2004, employment started to decline in 2001. In fact, employment in the lumber industry plunged 27% from an all-time high of 74,145 in 2000 to 54,454 in 2006.

In 2006 alone, job losses in the industry were especially marked in Ontario (-8.9%), Quebec (-7.5%) and British Columbia (-5.3%).

The study showed that labour productivity in the industry, as measured by economic output per hour worked, intensified starting in 2001. From 2001 to 2005 (the latest year for which data are available), it rose at an annual average rate of 5.8%, nearly five times the 1.2% gain in the manufacturing sector as a whole.

These gains in productivity were achieved partly by closing plants that were least efficient. This usually occurs when an industry undergoes major restructuring. Investments in new machinery and equipment also contributed after the brief recovery in 2004.

Shipments hit their lowest level in 14 years

In 2006, lumber shipments amounted to $11.9 billion, down 17.5% from 2005. This was the lowest level in 14 years, well below the level of $17 billion registered in 2004, when the industry enjoyed a short-lived recovery. In 2005, shipments declined 14.9%.

The lumber industry's production volumes grew more or less steadily until 2004, partly the result of strong demand in domestic and American housing markets, before posting back-to-back declines in 2005 and 2006.

Hence, the considerable declines in the value of shipments were due to a great extent to falling prices, which plunged to their lowest levels since 1992.

Declining exports to the United States

The decreases in the value of lumber industry shipments resulted largely from a significant decline in the value of exports to the United States in the past few years.

Canada's lumber industry is largely dependent on its exports to foreign markets, which make up around 80% of its production. In 2006, the value of its national lumber exports totalled $9.6 billion, 80% of which were shipped to the United States, by far its leading foreign customer.

Between 2000 and 2006, the value of national lumber exports regressed at an annual average rate of 4.9%, despite the recovery in 2004. Most of the decline can be attributed to falling lumber prices. The American housing construction market, a key lumber consumer, also experienced a marked slowdown in 2006.

Profitability comparable to other manufacturing industries

While it faced various trade and economic shocks during recent years, including generally low lumber prices, Canada's lumber industry restructured and remained profitable from 1999 to 2005.

When measured by the profit margin and the return on equity, profitability ratios for the lumber industry were at the average level, or slightly below, compared to other manufacturing industries. Profit margins are defined as operating profits divided by operating revenues. Return on equity is a measure of the return obtained by investors and is another indicator of profitability.

From 1999 to 2005, the industry had an average profit margin ratio of 6.0% compared with 6.4% for all manufacturing industries. This sustained industry profitability was due to the substantial productivity gains, among other factors, and to the brief but large surge in production and prices in 2004, when the profit margin hit a record 10.3%.

Furthermore, from 1999 to 2005, the return on equity for the industry stood at 8.9% on average, virtually on par with 8.8% for the manufacturing sector.

The profit margins and return on equity generated by an industry depend heavily on its profits from the sale of its products. The lumber industry made a record operating profit of $2.8 billion in 2004. This plunged 70.5% to $833 million in 2005.

Net profits also fell from $2.1 billion in 2004 to $409 million in 2005. This 80.7% decline may have been the combined result of a strong Canadian dollar, a rise in energy and production input costs and a drop in the price of lumber.

In 2006, a new pact with the United States was reached on softwood lumber exports. It included an agreement to reimburse most of the duties collected since 2002, and it established a new base price over which Canadian exporters will not have to pay duties. Time will tell how the industry's financial situation in 2006 and in subsequent years will be affected by this new agreement and the other factors influencing this industry.

Definitions, data sources and methods: survey numbers, including related surveys, 2101, 2103, 2134, 2318, 2501, 2510, 2612, 4218 and 5103.

The article "The Canadian lumber industry: Recent trends" (11-621-MWE2007055, free), as part of the Analysis in Brief series, is now available from the Publications module of our website.

For more information, or to enquire about the concepts, methods or data quality of this release, contact Daniel Dufour (613-951-5370), Small Business and Special Surveys Division.