Canadian Wood Fiber: Availability and Impacts

Increasing wood fiber costs continue to challenge western Canada’s export pellet sector. In particular, producers continue to struggle with fiber availability and quality as a result of sawmill curtailments in British Columbia.
By Andrew Copley | May 08, 2020

Canadian pellet producers continue to struggle with fiber availability and quality as a result of sawmill curtailments in British Columbia. The Canadian Pellet Feedstock Price Index (PFPI-Can), published in the Forisk Wood Fiber Review, rose year-over-year under the relentless pressure of increased fiber costs in British Columbia and the increased reliance on roundwood as sawmill residual fiber availability continued to decline. The overall price rise was moderated by additional production from eastern Canada, where cheaper fiber was available. The effects of the COVID-19 pandemic could intensify fiber supply challenges in Canada that have been looming for years.

British Columbia lost nearly 60% of its merchantable pine volume to the mountain pine beetle outbreak that began in the 1990s and affected more than 44 million acres of forest. The diminished supplies―as well as additional challenges from increased wildfire activity, reductions in annual allowable cuts, and U.S. tariffs on Canadian softwood lumber exports―have caused sizable losses to one of the largest lumber industries in North America.

Canadian softwood lumber production has been declining since 2017, with eastern Canada suffering smaller losses than western Canada. In 2019, 10 mills in British Columbia were shuttered or intended to close (with plans to rebuild at least one), and additional facilities announced permanent shift reductions or variable operating schedules (e.g., West Fraser). The closures and shift reductions totaled more than 2.7 billion board feet of lost capacity in the province. As a result, production in western Canada declined every quarter, falling 20% year-over-year, while eastern Canada declined 2.2%. The percentage of sawmill residuals as a feedstock for Canadian export pellet mills has trended lower since the fourth quarter of 2017, as demonstrated in Figure 1.

The reduction in sawmill residuals, a primary feedstock for many B.C. pellet mills, has put upward pressure on fiber prices. The PFPI-Can increased 0.4% in Q1 2020, reaching $70 CAN per oven dry metric ton (ODMT), a new high for the Index (Figure 2). After longer than two years of increases, the pace of rising fiber costs slowed in Q4 2019, as mills reduced their operating rates and diversified their feedstocks. The overall price increase in Canada was also moderated by production from eastern Canada, where two new mills opened in 2019 with lower cost feedstocks. The Index is up 30% since Q1 2017, coinciding with the decline in sawmill production. Higher costs of limited supplies diminish B.C. pellet producers’ profitability. Many mills are upgrading to allow more flexibility in feedstock inputs to counteract the loss of sawmill residues in the province. In addition to expanding pellet production capacity by 80,000 metric tons, Pinnacle’s Meadowbank and Williams Lake plants, like other B.C. pellet mills, have ongoing capital projects to allow for more diverse feedstocks.

Current PFPI-Can prices do not reflect the impact of COVID-19, which continues to accelerate throughout North America; further challenges to the fiber supply are expected. As of the end of March 2020, no major Canadian wood pellet producer had noted significant impacts from the coronavirus, as operations at pellet mills remain largely unaffected and most capital projects continue to move forward.  Other forest products industries, however, are already reacting to contracting aggregate demand. Softwood lumber production capacity in Canada, which was 28.4 billion board feet at the start of 2020, has been reduced by 20% within the last month. Many of these announced sawmill curtailments are for a week or two, with operating decisions being constantly revisited. Given the uncertainty around the impacts the virus will have, further and more prolonged reduction in softwood lumber capacity is possible, further constraining residual availability.

The Forisk Wood Fiber Review pellet feedstock price indices for Canada and the US (PFPI-Can and PFPI-US), show a quarterly volume-weighted price for the fiber consumed by each country’s pellet sector. The feedstock mix (roundwood, sawdust, shavings, microchips, and biomass), production capacity, and operating rates are gathered to calculate the regional price index. The price indices include the cost of chipping the roundwood and the hammering but not the drying costs.

1Conifex sold the Fort. St. James mill to Hampton Lumber, which plans to re-build the mill and have it operational by 2022.

2The dryer upgrade at Pinnacle’s Williams Lake facility is on hold as a result of COVID-19.

Author: Andrew Copley
Forisk Consulting LLC