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1. Introduction
2. Economic issues
3. The lumber industry: Recent trends, 2004–2009
4. Signs of recovery in 2010
5. Conclusion

1   Introduction

Forests cover approximately 397 million hectares of Canada's territory. This is more than twice the area of the province of Quebec and about 10% of the world's forest cover. ¹  The potential for logging and associated products is huge. Indeed, Canada is one of the world's leading lumber producers.

In recent years, the Canadian lumber industry has experienced various pressures, such as declining demand in the United States and the softwood lumber dispute between Canada and the United States.

This study examines the relationship between the issues affecting the lumber industry and the fluctuation of a number of economic variables, including sales, production volume, employment, the number of operating sawmills, and exports. We will try to answer the following questions: How is the lumber industry faring on these issues? What has changed? What has not changed?

For consistency in the data, we will not consider the period prior to 2004. Between 2003 and 2004, there was a major change in the methodology of the Annual Survey of Manufactures and Logging (ASML). We believe that this created a break in the trends in the associated variables. In addition, data from this survey at the time of writing were available only up to 2009.

Section 2 outlines the main economic issues affecting the lumber industry; Section 3 presents an analysis of the changes in selected economic variables between 2004 and 2009; the final section focuses on 2010, which saw a resurgence of economic activity in the industry. Note that in this study, the lumber industry is generally taken to be the sawmill industry (except single and shake mills), unless otherwise indicated. See the note to readers for more information.

2   Economic issues

2.1  Lower demand in the United States

The United States is Canada's largest trading partner. A decline in U.S. demand generally affects Canadian exporting industries.

One way of measuring U.S. demand for Canadian softwood lumber is to look at the number of housing units started in the United States. Between 2004 and 2010, the number of private housing starts dropped from about 2.0 million to slightly less than 587,000, a decline of about 70%.

In 2009, the number of private housing starts was just 554,000 units, its lowest level in 50 years. Although a slight increase in 2005 is observed, this downward trend indicates that demand for Canadian lumber decreased substantially between 2004 and 2010.

2.2  Lumber dispute between the United States and Canada

In 2001, the U.S. Department of Commerce ruled that the stumpage fees the Canadian government was charging Canadian logging companies were too low. The United States subsequently imposed countervailing duties on Canadian exports.

In 2006, the two countries signed a new Softwood Lumber Agreement. Essentially, the agreement provided for the withdrawal of the export duties and the reimbursement of most of the duties collected from Canadian forestry companies since 2002.

In this context, we see greater diversification of the export markets for Canadian lumber. The proportion of exports to the U.S. market decreased considerably between 2004 and 2010. In 2004, 81.1% of all exports were destined for the U.S. market; by 2010, the proportion was 58.7%. However, there were other factors at play also, as we will see later.

3   The lumber industry: Recent trends, 2004–2009

In the context of the two issues mentioned above, the lumber industry's contribution to the Canadian economy has decreased steadily in recent years. In 2004, the industry's sales accounted for 2.9% of total manufacturing sales; by 2009, the proportion was about 1.2%.

Even though its contribution may seem small, the industry is vital to some 200 rural communities, making up more than half their economies. ²  Forest products play a key role in the development of the more remote parts of Canada, including Aboriginal communities.

3.1  Sales and production volume

Between 2004 and 2009, the value of sales fell from $16.9 billion to $5.9 billion (-65.1%). Lumber production also declined during the same period, declining from 84.6 million cubic metres to 45.2 million cubic metres (-46.5%).

This decline in sales and production volume coincided with a decline in U.S. demand for lumber. As mentioned previously, the number of new privately owned housing units started was also decreasing during that period, except in 2005 (see Chart 1).

Between 2004 and 2006, the decline in sales can also be attributed to falling prices; production volume remained relatively stable, declining only 4.4% while prices dropped by 14.2%.

3.2  Employment and the number of operating sawmills

The declines in sales and production volume are also reflected in the decreasing number of jobs in the lumber industry. While there are lumber industry jobs across Canada, they are most heavily concentrated in four provinces: British Columbia (40.8%), Quebec (29.5%), Alberta (10.1%) and Ontario (8.6%). ³ 

Between 2004 and 2009, the number of direct and indirect jobs ⁴  across Canada dropped from 50,176 to 26,369 (-47.4%). In absolute terms, British Columbia was hardest hit, losing 9,494 direct and indirect jobs. Quebec and Ontario also suffered significant losses, as employment shrank by 6,795 (-46.6%) and 3,393 (-60.0%) respectively during the same period. In Alberta, the number of direct and indirect jobs declined somewhat less than the other three provinces, decreasing 1,124 (-29.7%) jobs between 2004 and 2009 (see table 1).

This widespread decline in employment was primarily due to the closure of many sawmills across Canada; the number of operating establishments decreased from 1,920 to 1,538 (-19.9%) between 2004 and 2009.

Of course, the lumber industry was not alone in suffering substantial employment losses in that period. Between 2004 and 2009, the manufacturing sector lost 357,000 jobs (-19.6%).

3.3  Exports

Between 2004 and 2009, the total value of exports of softwood lumber dropped from $11.9 billion to $4.2 billion (-64.8%). Over the same period, exports to the U.S. market fell from $9.6 billion to $2.6 billion (-72.7%), mirroring the slowdown in the American housing market.

The proportion of exports shipped to the United States has also decreased in recent years; 63.1% of lumber exports went to the U.S. market in 2009, compared with more than 80.0% in 2004.

As a result, the proportion of exports to countries other than the United States, Japan and Western Europe grew substantially, from just 3.7% in 2004 to 15.4% in 2009. China is among the countries consuming increasing volumes of Canadian lumber. In 2009, the value of exports to China was over $338 million, more than half of total exports to countries other than the United States, Japan and Western Europe.

We have created an index representing the variation in exports relative to 2004 in Chart 4. This demonstrates how the structure of export destinations has changed over time.

In 2009, the value of exports to other countries was nearly 1.5 times higher than in 2004, at about $643 million. Conversely, the value of exports to the United States was just 27.3% of what it was in 2004, a decline of more than $7.0 billion.

4   Signs of recovery in 2010

Despite the decreases between 2004 and 2009, the Canadian lumber industry showed signs of resurgence in 2010.

Between 2009 and 2010, sales rose from $5.9 billion to $7.4 billion (+25.9%), while production volume grew at a slightly slower rate, rising from 45.2 million cubic metres to 53.3 million cubic metres (+17.8%). These were the first gains since 2004.

Employment of the industry ⁵  increased from 34,364 to 34,532 (+0.5%) in 2010. This increase in employment, though not entirely concentrated in the lumber industry, is certainly a positive sign for forestry workers. Lumber exports were also up in 2010, rising to $5.3 billion, 27.0% more than in 2009.

Nevertheless, the proportion of lumber exports going to the U.S. market decreased to just 58.7% in 2010. In contrast, Canadian lumber exports to China have increased continuously, from less than 1.0% in 2004 to 13.2% in 2010. In 2010, the value of exports to China was almost equal to the value of exports to Japan. Moreover, some Canadian sawmills have started up again due to an increase of demand in Asia. ⁶ 

5   Conclusion

The lumber industry experienced some major changes between 2004 and 2010. A number of economic indicators were falling until 2009 and then turned upward in 2010.

Sales, production volume, employment and exports all declined appreciably, in part because of shrinking demand for wood products in the United States. In 2010, however, the trend reversed itself, and the indicators moved higher.

In addition, the proportion of exports going to the U.S. market declined until 2010. However, exports to other countries, especially China, have increased substantially since 2004.

That change in the structure of lumber exports is due to a number of factors, including lower demand in the United States. This appears to be supported by the number of new privately owned housing units started between 2004 and 2010. It is also interesting to note that the fall in demand started well before the 2008 crisis.