1 of 7 05/03/2008 3:58 PM

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1 1 of 7 05/03/2008 3:58 PM Wednesday» March 5» ,000 forestry jobs gone in past year Sawmills are shutting down across the province -- some sporadically, some for good. The situation isn't likely to improve any time soon Gordon Hamilton Vancouver Sun Saturday, March 01, 2008 Almost 10,000 British Columbia forest sector workers are out of jobs as sawmills respond to the collapse lumber demand in the U.S. by cutting production and sending people home. From Fort Nelson to Vancouver Island, mills are closing their doors, cutting back on shifts, operating sporadically or implementing job-sharing to get their costs down. A Vancouver Sun survey of companies that have announced layoffs since January 2007 shows 34 mills are down either permanently or indefinitely. Twenty-three have curtailed shifts or introduced job-sharing. The cost in jobs lost, both permanent and temporary, has climbed to 9,597. The shutdowns are often sporadic, with mills re-evaluating start-up week-by-week. But most companies say they see nothing on the horizon to encourage them to restart. Where shutdowns are long-term, such as the northern town of Mackenzie, where two sawmills and a related paper mill went down, workers are looking for direction, said Mayor Stephanie Killam. The jobless face tough choices: Either leave for Alberta or retrain for other sectors, which often means leaving the community. Bill Derbyshire, president of the Williams Lake local of the United Steelworkers union, said because many of the shutdowns are intermittent, it's difficult for workers to decide to quit to enroll in retraining programs. He expects workers will face periods of layoff into "I think we are just seeing the tip of the iceberg right now," he said. "Companies can only be cost-effective so much. When you get to the point when the market is flooded with wood and it's not selling, you've got to do something." Nobody is making money on commodity lumber right now, said Canfor Corp. president Jim Shepard. "There's no doubt about it; when you've got an entire industry losing money -- and I mean hundreds of millions of dollars -- this is a critical situation," Shepard said in a conference call this week with financial analysts. The industry is in the depths of what could be a two- to three-year downturn and the cash bleeding can only go on for so long. Some companies, like Pope & Talbot, which operated four sawmills and two pulp mills in B.C., have already gone broke. Others, like Canfor, are shedding workers by closing mills and cancelling shifts in a bid to preserve what cash they have during the lumber meltdown, the worst anyone in the industry can recall. Lumber prices collapsed

2 2 of 7 05/03/2008 3:58 PM in late 2006 and got worse throughout The downturn began in late 2006 when U.S. housing starts, which had peaked at 2.1 million a year in the summer months, began to falter. Lumber prices tumbled in response as producers, who had ramped up production to meet the record demand, continued to pump unwanted wood into a shrinking market. But problems deepened in 2007 when subprime mortgages -- loans given to buyers who would not qualify under traditional banking practices -- came up for renewal. Those buyers were stretched to the limit and many defaulted on their mortgages. The extent of the damage done to the U.S. housing market -- and the length of time it would take to recover -- became more evident. Mills in B.C. began cutting production. By January this year, housing starts had dropped to one million and lumber demand in the U.S. had shrunk by 13 billion board feet, the equivalent of removing a year and a half of B.C.'s total U.S. sales from the U.S. market. And the housing statistics industry executives monitor every day show no indication that this is the bottom. The most recent numbers from the U.S. show January new-home sales down 34 per cent year over year and down 2.8 per cent over December. Prices are down 15 per cent and new home inventories are up 10 per cent over December. "We are bringing our costs down but the problem is the market is dropping faster than our ability to get our costs down," said Canfor's Shepard, explaining how Canfor lost $199 million in "This is a situation that I have never witnessed before and in speaking with my colleagues in the industry it's nothing they have witnessed either. We are dealing with a tsunami here." Canfor alone has shed almost 1,000 jobs in the last year. Most CEOs are expecting markets to remain depressed until mid- to late By then, the B.C. forest industry will be in the hands of fewer players, with the small, independent sawmills being devoured by larger, integrated companies, further concentrating the ownership of sawmills and timber tenures in fewer hands. "Only those with very deep pockets can survive a significant downturn of two years or longer in duration," said John Elmsley, president of Prince George lumber company Winton Global, which is currently shut down. He said large integrated companies are the ones most likely to survive. They are the ones likely to buy up the capacity and timber tenures of companies that can't withstand a two-year downturn, he said. "It should come as no surprise to the people of B.C., but that is going to change the face of the industry in B.C. through rationalization. We will likely see larger integrated companies, less local ownership and less local autonomy." The consolidation has already begun. Coastal lumber company Interfor strengthened its position in the Interior this year by buying two sawmills from insolvent Pope & Talbot. More recently, it joined with West Fraser Timber in picking up Weyerhaeuser Co.'s Kamloops forest licences when that company shut down its Kamloops sawmill. Shepard expects Canfor to be one of the survivors. Financial statements show it ended 2007 with $295 million in cash. It is ready to pounce when opportunities arise to buy up competitors who have run out of cash. "We want to be absolutely sure that we have money in the bank when opportunities arise," Shepard said in an interview.

3 3 of 7 05/03/2008 3:58 PM "I think it will end up in consolidation and those companies that entered this storm with a decent bank balance and have prudently managed that bank balance through this period, hopefully, those ones will be able to come out of this with something left in the bank." he said. But independent producers say the large integrated companies often have more going for them than fatter bank balances. Specifically, provincial forest policies, no matter how well intended, are tilting the balance in favour of some companies over others. Tolko Industries and Winton Global say companies like Canfor and West Fraser have a government-approved two-month head start on a new way of lowering wood costs: warming the logs in kilns before they are scaled for value in order to better identify cracks and flaws that winter moisture disguises. It's a legitimate practice, but the head start given Canfor and West Fraser has created inequities. The province now permits other companies to use the method. But the winter logging season is almost over and Canfor and West Fraser already have logs in their inventory graded as salvage logs that cost them only 25 cents a cubic metre. Similarly-flawed logs in their competitors' inventories could have cost $10 a cubic metre. "There are some current policy issues that have created some inequities and tend to have more impact on the independent than on the integrated [sawmill-pulp-paper] sectors," said Mike Harkies, Tolko's general manager of southern Interior operations. "The industry has been working hard with government to try to balance those inequities. But the time it sometimes takes to get them corrected can cause that [shutdown] threshold to be triggered sooner for an independent firm than an integrated firm. That is the case today." And west along Highway 16, at Kitwanga, Mike Mitten, of Kitwanga Forest Products, said because of the way the stumpage system works, when one company pays less, other companies pay more to maintain a steady flow of provincial revenues. It's called the waterbed effect. A drop in stumpage in one sector is like pushing your finger down on a waterbed. The depression causes the water level -- the price of logs -- to rise everywhere else. "There are a few things the government needs to address. One of them is the disparity in the stumpage structures. If somebody is paying a lower stumpage rate in the province, the government is looking to somebody else to pick up the slack. It's those of us who are still operating that keep seeing our stumpage going up," said Mitten. Kitwanga is the last surviving sawmill in the province's northwest and having its stumpage rate climb makes survival all that much harder, he said. "The market is affecting us like everybody else," Mitten said. "Through March we are going to play it week by week. "Right now we are still buying logs so we are supporting the logging community as best we can and they are supporting us as best they can. Kitwanga is a very small community and we are the only operating sawmill in the entire region." Kitwanga isn't the only company looking at its sales a week or two out and deciding whether to operate or not. Tolko, the province's largest privately held forest company, is doing the same. "We are playing it week by week. Every Friday we will make a call on the next week out," said Jim Baskerville, regional manager of Tolko's plywood

4 4 of 7 05/03/2008 3:58 PM operations. Last week Tolko announced a two-week shutdown at its Okanagan plywood and veneer mills, sending 300 workers home. But the two weeks has already been extended to three. A second two-week shutdown at four sawmills begins Monday, affecting 1,100 workers. It's uncertain whether two weeks will be sufficient. "What we have announced is a two-week curtailment that will be re-evaluated week by week depending on how the market is," said Rob Fraser, Tolko's general manager of Cariboo and Alberta operations. "Unfortunately the current economic conditions do not support the continued operations of our mills at their current levels." Baskerville said it will take "a fundamental demand-driven correction in the marketplace," before plywood operations resume. The market right now is too over-supplied. "It's like telling somebody 'I've got this wood to sell, will you buy it?' and the person says: 'Well, I don't need it, but if you really need to sell it, here's the price.' Those market dynamics just don't work." ghamilton@png.canwest.com AN INDUSTRY IN CRISIS The map circles below detail 6,155 jobs lost to permanent, long-term and indefinite B.C. mill closures that The Vancouver Sun has identified since January of When you add the impact on loggers, wood re-manufacturers and losses due to shift reductions, total jobs affected in the province total almost 10,000. NORTHERN INTERIOR Fort Nelson: Canfor Polarboard OSB mill to close indefinitely this summer jobs Fort St. James: Pope & Talbot (indefinite) jobs. Stuart Lake Lumber (indefinite) jobs Chetwynd: Canfor sawmill (indefinite) jobs Terrace: West Fraser sawmill (indefinite) - 80 jobs Mackenzie: AbitibiBowater 2 sawmills, 1 paper mill jobs Prince George: Winton Global (indefinite) jobs McBride: McBride Forest Industries veneer mill jobs SOUTH COAST Metro Vancouver: Western Forest Products sawmill jobs Fraser Pulp Chips - 45 jobs Canfor Panel & Fibre jobs Interfor sawmill jobs Port Alberni: WFP planer (indefinite) - 21 jobs

5 5 of 7 05/03/2008 3:58 PM Campbell River: TimberWest sawmill jobs SOUTHERN INTERIOR Williams Lake-100 Mile House: Tolko Industries four sawmills (temporary) - 1,100 jobs Kamloops: Weyerhaeuser sawmill jobs Lytton: Lytton Lumber - 55 jobs Canoe: Federated Co-Operatives (indefinite) jobs Armstrong: Tolko plywood plant and veneer plant (temporary) jobs Salmon Arm: Coe Newnes McGehee equipment supplier (indefinite) - 30 jobs Enderby: North Okanagan Cedar - 28 jobs Kelowna: Tolko Plywood Division jobs OKANAGAN FALLS: Weyerhaeuser sawmill jobs TSW Laminating - 15 jobs MIDWAY: Pope & Talbot sawmill (indefinite) jobs Midway Forest Products (indefinite) - 85 jobs Grand Forks: Pope & Talbot sawmill (indefinite) jobs Castelgar: Pope & Talbot sawmill (indefinite) jobs CRANBROOK: Tembec planer (until Oct.) - 40 jobs Galloway Lumber (indefinite) jobs Adams Lake: Interfor sawmill, being re-evaluated week by week jobs SHIFT REDUCTIONS - Feb. 15/08: West Fraser Timber's Pacific Inland Resources mill at Smithers curtails graveyard shift - 25 jobs - Feb. 15/08: West Fraser Timber's 100 Mile House sawmill. Indefinite curtailment of graveyard shift - 51 jobs - Feb. 1/08: Tembec reduces work week; implements work-share program at Elko, Canal Flats sawmills and Cranbrook fingerjoint mill workers lose a day a week, 80 job equivalents - Jan. 10/07: West Fraser Timber's Houston sawmill indefinitely curtails graveyard shift - 70 workers - Dec. 28/07: Springer Creek Forest Products, Slocan, cuts two shifts to one - 85 jobs - Dec. 21/07: Fingerjoint manufacturer East Fraser Fiber indefinitely drops a

6 6 of 7 05/03/2008 3:58 PM shift at Mackenzie - 45 jobs, and in Quesnel, 8 jobs - Dec. 5/07: Hampton Affiliates to cut production by 40 per cent for both Babine Forest Products and Decker Lake Forest Products at Burns Lake effective Jan workers on three days, receive EI benefits 2 days a week; 120 job-equivalents - Nov. 28/07: Canfor to move from three shifts to two at Rustad, Clear Lake, Polar, and Mackenzie sawmills jobs - Oct. 25/07: Apollo Forest Products, Fort St. James sawmill on four-day work week, planer on 3-day work week indefinitely - 24 job equivalents - Oct. 22/07: Tolko cuts from three shifts to two at Creekside Division, Williams Lake and Lavington Planer Division, Lavington - 75 jobs - Sept. 04/07: Tolko to move from three to two shifts at Armstrong - 20 jobs - July 27/07: Canfor to operate only one production facility at Mackenzie mill jobs - July 6/07: Winton Global Prince George cuts from three shifts to two - 78 jobs - June 15/07: Tembec to indefinitely shut down third shift at Elko sawmill, Cranbrook planer mill and second shift at Cranbrook fingerjoint. Most employees are relocated within the company - 21 jobs - May 22/07: Tolko's Nicola Valley Division in Merritt moves from three shifts to two until market fundamentals improve - 22 jobs. - January/07: Louisiana-Pacific curtails graveyard shift at its Golden plywood and laminated lumber plant - 75 jobs. TOTAL: 1,229 jobs THE IMPACT ON LOGGERS A selected sampling in four communities where companies have failed or shut down sawmills shows: loggers are expected to be out of work as a result of the Mackenzie and Fort Nelson mill closures loggers are out of work as a result of the failure of two major two contracting businesses in the Cowichan Valley loggers are out of work in the West Kootenay as a result of the Pope & Talbot insolvency. Total: 1,400 WOOD RE-MANUFACTURERS Layoffs, curtailed shifts and indefinite closures: - Metro Vancouver: 34 companies, 356 jobs. - Vanderhoof: one company closes. 90 jobs. - Okanagan: eight companies, 119 jobs. - Vancouver Island: 15 companies, 242 jobs. - Kootenays: one company, six jobs.

7 7 of 7 05/03/2008 3:58 PM Total: 59 companies, 813 jobs TOTAL: 9,597 jobs ONLINE: vancouversun.com Visit our interactive map - Look under Editor's Picks at and leave your comments there You can now listen to every Vancouver Sun story on our new digital edition. Free to full-week print subscribers or sign up for a 7-day free trial. The Vancouver Sun 2008 Copyright 2008 CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved. CanWest Interactive, a division of CanWest MediaWorks Publications, Inc.. All rights reserved.