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«Trends and Prospects UNECE Committee on Forests and the Forest Industry November 3, 2015 Prepared by: Policy, Economics and Industry Branch Canadian ...»

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Given the significant increases in oil production over the past decade in North America – namely from the Canadian oil sands and the shale rock formations in the U.S., oil prices have softened significantly since supply began exceeding demand. The recent collapse in oil prices is primarily due to an oversupply of crude oil, particularly from the U.S., where crude output is at its highest level in 30 years and Saudi Arabia, which is producing crude oil at record volumes. OPEC oil producing states have ramped up production in a bid to maintain market share, further exacerbating excess supply and driving down global prices.

The price of oil (West Texas Intermediate) had risen 17.5 percent to US$93 per barrel from 2010 to 2014. However, prices have declined significantly in the first 8 months of 2015, averaging US$42.87 per barrel in August 2015, a decline of 55.6 percent from August 2014.

Natural gas prices remain weak in North America due to an oversupply in the market. The National Energy Board anticipates that the North American natural gas market will remain saturated from 2015 to 2017. Propane prices have also seen significant declines due to excess supply in the market. Liquid propane prices have declined by 25 percent between the first 8 months of 2014 to the same period in 2015.

Lower energy costs have helped to boost the overall competitiveness of the forest industry.

Exchange Rates Exchange rates continue to play a role in the prosperity of the forest industry since most Canadian forest products are sold in U.S. dollar terms while the sector pays most of its costs in Canadian dollars. The Canadian dollar appreciated against the U.S. dollar between 2009 and 2012, to reach parity in 2012. It decreased over the course of 2013 to US$0.97 and in 2014 to US$0.95. The Canadian dollar continued its downward trend in 2015, averaging US$0.75 in September 2015, in large part due to weakness in oil prices.

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In recent years, the Russian Ruble has depreciated considerably against both the Canadian and US dollars. By September of 2015, the Russian currency was worth 50.2 rubles per Canadian dollar and 66.8 rubles per US dollar.

US Housing Market The U.S. housing market is the primary driver behind softwood lumber and wood panel demand in North America. The U.S. housing market has strengthened considerably from the depths of economic recession. Starts have grown considerably since 2012, when they totalled 784,000 units. Starts grew to 928,000 units in 2013 and reached 1 million units in 2014. In the first 8 months of 2015, annualized starts averaged 1.126 million units. This level of housing starts is still below the long-term (20 year) average of 1.4 million annual starts, although the market has seen steady improvement from 2009 when housing starts had dropped to a low of 554,000 units.

Exports of softwood lumber to the U.S. have increased markedly, rising 127 percent above 2009 levels to $5.5 billion. In the first 6 months of 2015, the value of softwood lumber exports to the U.S. have risen by 6.7 percent to $2.86 billion compared to the same period last year and the anticipation of the U.S. market recovery should sustain softwood lumber demand.

National and Provincial Building Code Changes In Support of Wood in Mid-Rise Building Construction A number of Canadian policies and initiatives changed in 2015 to better enable the use of wood in mid-rise building applications.

Ontario’s new building code that raises the limit of wood frame buildings from four to six storeys came into force on January 1, 2015. These amendments go beyond British Columbia’s Building Code changes in 2009, by allowing mid-rise wood construction in residential, commercial and mixed occupancy markets.

Changes to Ontario’s building code are expected to enhance the competitiveness of the province’s wood products sector by generating new demand for forestry products. This has been the case in British Colombia where over 396 wood mid-rise buildings are in various stages (contemplated, preparing drawings, under construction, and completed), of which 67 buildings have been completed to date.

In March 2015, Private Member’s Bill 203 was passed, allowing up to six-storey wood-frame construction in Alberta. This brought the province in line with the City of Calgary which began accepting applications for six-storey wood-frame construction where zoning allows, in November 2014. With Bill 203, Alberta joined British Columbia, Ontario and Quebec on the list provinces adopting provisions for wood in mid-rise construction within their respective building codes ahead of changes to Canada’s national model building code.

November 2015

In late March 2015, new provisions that allow wood-frame construction up to six storeys at the national level were unanimously approved by the Canadian Commission on Building and Fire Codes. The changes will be reflected in 2015 edition of the National Building Code of Canada (NBCC) which is expected to be released by the end of this calendar year.

The new mid-rise provisions will better enable the construction of larger, taller wood buildings and will help foster greater use of wood in public and private buildings across Canada. NRCan, along with the Canadian Wood Council, FPInnovations, the NRC, the governments of British Columbia, Ontario and Quebec, and a number of provincial and municipal authorities, played a key role in influencing these code changes.

IV. Developments in Forest Products Markets Sectors Wood Energy Policy The Canadian forest sector makes widespread use of forest biomass in the cogeneration of heat and electricity for use in industrial processes and sale to 3rd parties. In 2012, the biomass installed generating capacity was 2,103 MW, 79% of which was installed at pulp and paper facilities. In addition, several private utilities generate electricity using wood wastes and other biomass materials as fuel. In 2012, forest biomass accounted for close to 2% of the electricity generated in Canada.

In 1990, fossil fuel use accounted for 32% of the forest sector's energy needs. A focus on changing the fuel supply mix and improving energy efficiency in the industry caused fossil fuel use to fall to 20% by 2012. Over the same period, the sector’s use of renewable energy has risen from 68% to 80%.

Wood pellets are a small but important market for the Canadian forest industry. Canada's wood pellet production capacity has grown from 500,000 tonnes in 2002 to 3.51 million tonnes in 2014, with close to 2.60 million tonnes of pellets being produced, largely for export. The conversion of two coal-fired generating stations in Ontario will increase future domestic wood pellet demand and create the largest peak capacity power plant in North America fuelled by 100% biomass.

Developing liquid fuels from biomass continues to be an important focus for Canada. The federal Renewable Fuel Regulations, which took effect in much of the country in December 2010, requires an average of 5% renewable fuel content in gasoline across Canada. Biodiesel production and use in Canada is still in the early stages of adoption. The federal Renewable Fuel Regulations include provisions requiring an average 2% renewable fuel content in diesel fuel and heating distillate oil. This requirement went into effect on July 1, 2011.

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Value-Added Wood Products2 Market acceptance of Engineered Wood Products (EWPs) —the shift from larger dimension lumber to EWPs and the shift from stick-built homes to factory-built homes— contributed to the significant growth of this segment that began in the mid-1990s.

In 2014, just under $2B in value-added products were exported, the majority of it supplying the US market (83.8%) followed by the U.K (8.2%) and Italy (2.0%). In 2014, the value of total exports of value-added wood products increased 11.4 percent compared to the year prior.

Sawn Softwood Since the marked improvements between 2009 and 2010, softwood lumber production has continued to recover but at a slower pace. Between 2010 and 2014, Canadian sawn softwood production increased by 12% to 58.2 million cubic metres. However, North American sawn softwood prices increased substantially, growing 35% over the same 5 years. The strengthening U.S. housing market, along with continued demand from China for softwood lumber, was behind the price increase in 2014. Indeed, in 2014, the volume of Canadian sawn softwood exports to the U.S. increased by 34.4%.

While the pace of demand growth is tapering, the U.S. demand for Canadian softwood lumber is still rebounding thanks to improvements in the housing market. Between 2013 and 2014, Canadian exports of softwood lumber to the U.S. increased 22% to $5.5 billion and in the first 6 months of 2015 exports have increased 6.7% compared to the same period previously.

China has become a significant offshore market for Canadian sawn softwood products as exports have increased tremendously over the span of a decade. As of January to August 2015, China holds a 16.9% share of total Canadian sawn softwood exports (by volume). Demand in China has been driven by large government infrastructure projects. A switch to a slower-growth, more consumer-driven economy, could negatively impact demand for lumber. During 2005 to 2014, sawn softwood exports to China increased by almost 30-fold on a volume basis, from 253,280 m3 to 7,556,094 m3. More recently, the value of softwood lumber exports to China increased 3.4% in the first 6 months of 2015 compared to the same period in 2014 while the volume of softwood lumber exports to China decreased by 4.5% during that time. While China will remain a key market for sawn softwood, who will supply that lumber is unclear. In 2014, Russia surpassed Canada to become the largest softwood lumber exporter to China.

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Oriented Strand Board OSB represents a large portion of Canada’s total structural panel exports (almost 95%). It is expected that as the U.S. housing market continues to improve, OSB’s production will rebound.

Given that 89.7% of OSB is destined for the U.S. market, and in particular goes towards housing construction end-uses, OSB exports suffered during the downturn in the U.S. housing market that began in 2008, but have started growing again thanks to a recovery that has gained traction.

Between 2009 and 2014, total exports of Canadian OSB grew by 108.5% to $1.1 billion.

However, the rebalancing of capacity with demand has proven challenging: in 2014, OSB production was significantly outpacing the demand and OSB prices were struggling. Despite the solid increase in export volumes, the value of OSB exports in 2014 was 10% lower than in 2013 due to persistently low OSB prices.

Paper and Paperboard

The value of Canadian paper and paperboard exports declined by 4 percent between 2010 and 2014 to $9.5 billion. The industry faces weak producer margins and is highly sensitive to any cost increases. The main issue facing paper and paperboard producers lies in the demand outlook for newsprint and other graphic paper, which is dire. In fact, demand for all types of paper used to communicate printed information is declining, due to the transition towards electronic media, particularly in the U.S.. In addition, an ongoing trade dispute with the U.S.

further challenges the competitiveness of some Canadian paper exports. In July, the U.S.

Department of Commerce imposed tariffs on Canadian supercalendered paper based on allegations that Canadian exporters receive subsidies. On the positive side, the decline of the US$/CAD$ exchange rate has provided the sector with an advantage over US producers and enhanced its competitiveness.

There are some segments facing positive outlooks such as packaging paper or household and sanitary papers. However, given the prominence of graphic paper production in Canada, there appear to be limited growth prospects for this sub-segment.

Wood Pulp While the current global pulp markets are susceptible to fluctuations, they continue to be generally robust. Despite the current loss of end-use from a declining printing and writing paper segment, demand from other segments is growing (sanitary, packaging and viscose staple fibres in the textile industry). In 2014, the value of Canadian wood pulp exports increased by 6.7% while the volume of overall Canadian wood pulp exports actually decreased by 1.6% compared to 2013. The improved performance in 2014 was largely due to the price increase, with average North American Northern Bleached Softwood Kraft (NBSK) pulp prices up 9% compared to 2013.

An increasingly important determinant of pulp markets is Asian demand. In particular, global pulp prices are largely influenced by inventory management cycles in China. The value of Canadian pulp exports to China has grown at an annual average rate of 10.5% from 2004 through November 2015

2014. China has surpassed the U.S. to become Canada’s number one pulp export market since 2012, accounting for 38% of Canadian exports (exports to US accounted for 36% of total) in

2014.The Chinese pulp market is expected to keep growing, fuelled by two main factors. First, China has greatly expanded its paper capacity and this is contributing to increased demand for pulp. Second, China has significantly reduced its domestic non-wood pulp capacity (e.g. reed, bamboo and bagasse), causing Chinese paper producers to further source pulp supplies from international markets. The drive to reduce inefficient, highly polluting non-wood Chinese pulp capacity will likely continue.

In the long-term, Chinese pulp demand is likely to keep growing. However, low-cost foreign competition will play a role in determining Canada’s market share. For instance, the low Ruble has led to dramatic increase in pulp imports from Russia in 2014 (over 24%) while Canadian imports only rose 4%.

Dissolving pulp demand has been steadily growing for several years, primarily driven by the textile industry and experienced a remarkable growth a few years ago. It is primarily exported to markets in China (40%), the U.S. (14%) and India (15%). However, a rapid global expansion in capacity, especially in Brazil, China, the U.S. and Canada, has led to global supply outpacing demand, significantly lowering prices. This very competitive segment has been the subject of trade dispute. Canadian exports to China were down 20% over 2014 relative to 2013, mainly due to the anti-dumping duties against Canadian producers by China’s Ministry of Commerce.

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