MNI ANALYSIS: Canada Lumber Pain Keeps Pressure For BOC Cut

--Mills Closing Amid Sales Decline Worse Than Energy Downturn

By Anahita Alinejad

     OTTAWA (MNI) - Canada's historic forest industry is facing hard times that

will keep pressure on the central bank to consider cutting interest rates next

year.

     British Columbia mills are shutting during a supply squeeze caused by

forest fires and insects eating up product. Producers across the rest of the

world's second largest land mass are also suffering from U.S. tariffs on

softwood lumber, an industry that was excluded from the USMCA agreement.

     Wood producers by some measures are doing even worse than Canada's oil

industry, which has been slashing investment and jobs amid lower prices and

cheaper foreign product. Manufacturing numbers released Tuesday showed wood and

paper sales fell 12% and 14% respectively in the 12 months through October, more

than the 8% fall in petroleum and coal.  

     Weak factory sales and bloated inventories including lumber show trouble is

spreading beyond the job market, meaning the BOC will cut rates in the first

quarter of 2020, says Scotiabank economist Derek Holt. "The broader evidence

does not support the BoC's official public line of reasoning that weakness is

just in one jobs report," he wrote in a note on Tuesday. 

     Wood product companies held inventories that were more than twice their

monthly sales in October. That's much higher than the overall manufacturing

ratio of 1.54, which itself is a sliver away from the highest reading since the

last recession a decade ago.

     The contribution of forestry to Canada's GDP reached the lowest since 2010

in September at C$3.5 billion, a drop from C$4 billion during the middle of last

year. October exports of lumber and other sawmill products reached the lowest

since May 2015, extending the 12-month decline to 12%. Producers face U.S.

duties on softwood lumber ranging from about 9% to 24%, a policy the Trump

administration extended as his officials opened trade talks with Canada.

     Companies are cutting back on investment as profits dwindle. Capital

spending has fallen almost 6% since 2016, and quarterly operating profits have

fallen for five straight quarters to C$225 million, government figures show. 

     Forest companies are also working their equipment at a lower rate than

energy companies, at 75% versus 78% in the third quarter. That comes as

construction companies are working at the highest pace in more than a decade at

91% to fuel a building boom, suggesting Canadian lumber firms are missing out on

that too. That spare capacity in forestry suggests more cutbacks are possible.

     Canada's manufacturing base takes another blow this month as an Ontario GM

auto plant closes. The BOC has long raised questions about competitiveness,

while holding rates because resilient domestic spending offsets damage from

global trade fights. 

     "One Canadian industry is quietly suffering," BMO Capital Markets senior

economist Robert Kavcic wrote in a research note. "While oil & gas and autos get

a lot of attention in Canada (negative attention of late), note that the

forestry sector is the one that is really feeling the pain."

     Without a fresh contribution from loggers who staked out most of Canada

centuries ago, markets may be overstating the odds that the BOC will hold onto

the G7's highest policy rate through all of next year.

--MNI Ottawa Bureau; +1 613 981-1671; email: anahita.alinejad.ext@marketnews.com

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