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Thursday, July 10, 2003 - Page updated at 12:00 AM

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Rise in Canada's currency may force timber solution

Seattle Times business reporter

In the end, money may do more than talk.

A year of negotiations has failed to end a dispute between the United States and Canada over $7 billion in lumber imports. Now a jump in the Canadian dollar may force a resolution.

The Bush administration in May 2002 imposed tariffs to compensate for what it says are Canada's unfair timber-industry subsidies. U.S. negotiators want to force changes in the way Canada manages its forests before lowering the U.S. trade barrier.

While many small Canadian mills have since closed, others have increased production to offset the tariffs — which average a total 27 percent — and still make a profit. Some have been able to hunker down with thin profit margins while challenging the U.S. policy through international trade organizations.

Timber companies in the United States and Canada say they want an end to the dispute, which has dragged on and is likely to hit upcoming quarterly results. That might happen now that the Canadian dollar is weighing in.

A more expensive Canadian currency hurts Canadian companies that sell products in U.S. dollars and use the proceeds to pay costs at home. Those exports to the U.S. account for 35 percent of Canada's economy.

"Some mills were able to show close to (a) profit, even with the duties," said Laurie Cater, publisher of Madison's Canadian Lumber Reporter, a Vancouver, B.C., trade journal. "The exchange rate is something that may accelerate some kind of settlement."

Canada's currency rose partly because investors sought returns from interest rates 2.25 percentage points higher than in the United States. From 63 cents in January, the Canadian dollar recently soared to about 75 cents, the highest level in nearly seven years.

Expectations that Canada's central bank may soon cut rates took some of the air out of the run-up in recent days, but the currency is still 14 percent higher this year.

Previously, Canada's weak currency made Canadian lumber cheap in the United States. Settling the trade dispute was less pressing for producers in Canada.

Even with the tariffs, Canadians held more than one-third of the booming U.S. wood market, according to statistics from the Coalition for Fair Lumber Imports, a group of U.S. companies that backs the tariffs.

Designed to shelter U.S. companies, the tariffs have cost jobs and profits on both sides of the border. Imports from Europe and Latin America have flooded the market and lowered prices.

Negotiators from both countries met in Washington, D.C., Monday to discuss the impasse; they are to meet again later this month. But since each Canadian province sets its own forestry policy, cobbling together a single position has been tricky.

British Columbia already has announced plans similar to those proposed by the United States. Quebec, which has smaller mills, has resisted. A U.S. proposal last month left out Quebec entirely.

U.S. lumber executives hope the currency shift will prompt Canadian producers to make a deal. The prospect has U.S. companies rejoicing.

Canadians will soon be "getting fed up" with losing money, said Rick Holley, chief executive of Seattle-based Plum Creek Timber, a key backer of the U.S. policy.

"The Canadians are going to force their own coalition of provinces and companies together, and I think that's what gets it done now," he said. "Heretofore, that wasn't happening. Part of it was most of them were still making some money."

Holley said a 10 percent slump in log prices costs his company $50 million — almost equal to a quarter of its annual profit.

Lumber prices have fallen 32 percent to an average $279 per thousand board feet in May from over $400 two years earlier, according to Random Lengths, a Eugene, Ore., company that tracks 15 kinds of lumber.

Prices recovered to $317 last week due to less supply.

A resolution to the dispute, especially if it sets import levels linked to the exchange rate, could boost prices 10 percent, Holley said. Such an arrangement would mean less Canadian lumber in the U.S. if the Canadian dollar fell.

A settlement couldn't come too soon for much of British Columbia. Dozens of its mills have closed or curtailed production since the tariffs took effect.

Each company pays a different tariff rate, based on calculations by the U.S. Commerce Department of how much subsidy it gets from the Canadian government.

Weyerhaeuser, which has big operations on both sides of the border, opposes the tariffs because it pays a duty totaling about 32 percent on exports from Canada. Because it makes paper and other products in addition to lumber, it's caught in the exchange-rate effect, too.

"We are a net beneficiary of the weakening U.S. dollar," said Frank Mendizabal, a spokesman for the Federal Way-based company. "It makes our products more competitive in world markets."

Bradley Meacham: 206-515-5066 or bmeacham@seattletimes.com

Copyright © 2003 The Seattle Times Company

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