When the Mountain Pine Beetle arrived in British Columbia (BC) in the early 1990s, no one knew what the full effects of the infestation would be or how long it might take these effects to materialize. Over the course of the last several years, however, the effects on forest products industries have started to take shape. And the news is concerning. The Mountain Pine Beetle infestation has led annual allowable cut (AAC) reductions, and this in turn has led the Forest Analysis & Inventory Branch of the Ministry of Forests to forecast a drop in timber supply of 25 percent over the next twenty years, from 76.71 million cubic metres in 2016 to 56.91 cubic metres in 2035.
The Reason for Annual Allowable Cut Reductions
The pine beetle infestation decimated Interior forests. The Ministry has pegged the losses in all of BC at 54 percent of merchantable pine. In the Interior, however, the losses are 80-90 percent of the merchantable pine. To salvage the dead timber and supply the Interior’s 153 wood consuming mills (91 are sawmills), AACs were raised in recent years. Now that salvage operations are winding down, however, the Ministry has made the decision—in the interest of forest health and sustainability--that it is time to reduce the AAC uplifts. At a recent industry meeting, Albert Nussbaum, Director of Forest Analysis and Inventory for the BC Ministry of Forests, Lands and Natural Resource Operations warned industry delegates that the allowable annual cut (AAC) will be significantly reduced in some Interior Timber Supply Areas (TSAs) in 2017:
- Quesnel TSA—a 60 percent reduction (from 4 million cubic metres to 1.6 million cubic metres) in the February/March timeframe.
- Prince George TSA in the May/June timeframe (the size of the reduction is yet unknown).
- Lakes TSA in late 2017 (the size of the reduction is yet unknown here as well).
The Effects of ACC Reductions on Sawmills
In March 2016, the AAC was reduced in the Interior Timber Supply Area of Merritt by 37 percent: from 2.4 million cubic metres to 1.6 million cubic metres. And with the ACC scheduled to drop to 1.2 million cubic metres in 2021, the future did not look good for wood products producers in the area. Six months after the AAC reductions went into effect, Tolko Industries Ltd. announced it would shutter its Nicola Valley sawmill in Merritt. By mid-December, the mill was closed. The estimated capacity of the mill—211 million board feet—has been permanently removed from the system.
The 2.4 million cubic metre reduction in Quesnel is likely to have a similar effect on the region’s sawmills. First, as supply is constrained, timber prices are likely to increase, putting pressure on sawmill margins. Since raw material costs are roughly 70 percent of a sawmill’s operating budget, however, margins can only be squeezed so far. Closures are almost certain. Currently, there are two large (more than 190 million board feet of estimated capacity) lumber mills operating in the TSA: Tolko and West Fraser.
In Prince George, there are another four: two Canfor mills and one each for Carrier and Dunkley. Three sawmills operate in the Lakes TSA: Babine, Canfor at Houston, and Decker’s smaller mill. Estimates of just how many sawmills are likely to close in BC over the next five years as more AAC reductions are rolled out range from three to eight.
The Trickle-Down Effect
And sawmills are not the only wood consuming facilities at risk. As sawmill capacity is reduced, secondary chip supply will plummet. This will cause chip prices to skyrocket in hard hit areas, squeezing margins at pulp and paper, OSB and pellet mills. The final toll of the AAC reductions—and of the mountain pine beetle outbreak—has yet to be seen.
Keys to Mill Survival
The next several years for wood products manufacturers in the Interior will be challenging. In order to survive, British Columbia sawmills will need to master survival techniques, even if that means doing things differently than they have in the past.