Wood costs continue to be much lower for pulpmills in British Columbia and Alberta as compared to the provinces in Eastern Canada. In the 3Q, there was more than a 30% fiber cost discrepancy favouring Western Canada. Historically, pulpmills in Eastern Canada have had substantially higher wood costs with the exception of a few quarters in 2001 when costs were on par. Since wood costs account for between 40-50% of the variable production costs when producing wood pulp, there are likely to be the most casualties in the pulp industry in Eastern Canada in 2009 when pulp and paper prices are expected to decline.

Lumber production in Canada is continuing its downward spiral with no end in sight, reaching a new low in the 2Q. Production was down 22% from a year ago and was 27% lower than two years ago. In recent months, sawmills in Ontario and Quebec have been harder hit than in the western provinces, which is a turn-around from earlier in the year. The reduced supply of residual chips from sawmills is a major problem for pulpmills throughout Canada as they historically have relied to a large extent on this relatively inexpensive fiber source to stay competitive with US and European pulp and paper mills.

Three years ago, pulpmills in British Columbia consumed 95% residual chips from sawmills; today, they are using 30-40% roundwood chips, which are coming mostly from beetle-killed timber in the Interior of the province. This new more expensive wood fiber source will continue to be very important until housing starts (and lumber demand) in the US are on the rise again, and this is not expected to occur anytime soon. Unless the Canadian dollar weakens against the US dollar and sawmills are becoming more competitive in Canada, pulpmills will continue to rely on costly roundwood chips and total wood costs will stay high well into 2009.

Pulpwood and wood chip market updates are included in the 24-page publication North American Wood Fiber Review. The report, established in 1982 and with readers in most of the large forest companies in North America, tracks wood chip and pulpwood prices in 15 key markets of the US and Canada.