Three things to take away
What is the outlook for the Canadian forestry sector and how are political and economic factors impacting operations and prospects.
What impact does risk modelling show in the event of house and asset price crash scenarios
What are the steps forestry firms can take to mitigate the risks around economic instability, supply chain disruption, diversification and selling into emerging markets
Canada’s political and business climates are facing a growing set of challenges. A minority government is under growing pressure from all parties and provincial governments, while trade disputes between the US and Canada remain intractable, including one over softwood lumber.
Compounding these issues for Canadian businesses are stubbornly high inflation, slowing economic growth and rising interest rates, reducing North American home construction and demand for wood products. In addition, this year saw the worst series of forest fires in recorded Canadian history at the start of wildfire season, affecting eleven provinces and territories. These factors – in addition to increasingly motivated environmental activists – are clouding prospects for the Canadian forestry industry in the next year.
What is the outlook for the Canadian forestry sector and how are political and economic factors impacting operations and prospects.
What impact does risk modelling show in the event of house and asset price crash scenarios
What are the steps forestry firms can take to mitigate the risks around economic instability, supply chain disruption, diversification and selling into emerging markets
Canada’s political and business climates are facing a growing set of challenges. A minority government is under growing pressure from all parties and provincial governments, while trade disputes between the US and Canada remain intractable, including one over softwood lumber.
Compounding these issues for Canadian businesses are stubbornly high inflation, slowing economic growth and rising interest rates, reducing North American home construction and demand for wood products. In addition, this year saw the worst series of forest fires in recorded Canadian history at the start of wildfire season, affecting eleven provinces and territories. These factors – in addition to increasingly motivated environmental activists – are clouding prospects for the Canadian forestry industry in the next year.
Introduction
Canada’s political and business climates are facing a growing set of challenges. Prime Minister Justin Trudeau leads a minority government that has been under growing pressure from within the Liberal party, opposition parties and provincial governments. While US-China strategic rivalry fuels nearshoring and integration of North American markets, trade disputes between the US and Canada remain intractable, including one over softwood lumber.
Compounding these issues for Canadian businesses are stubbornly high inflation, slowing economic growth and rising interest rates, reducing North American home construction and demand for wood products. These factors – in addition to increasingly motivated environmental activists – are clouding prospects for the Canadian forestry industry in the next year.
Canada’s political and business climates are facing a growing set of challenges. Prime Minister Justin Trudeau leads a minority government that has been under growing pressure from within the Liberal party, opposition parties and provincial governments. While US-China strategic rivalry fuels nearshoring and integration of North American markets, trade disputes between the US and Canada remain intractable, including one over softwood lumber.
Compounding these issues for Canadian businesses are stubbornly high inflation, slowing economic growth and rising interest rates, reducing North American home construction and demand for wood products. These factors – in addition to increasingly motivated environmental activists – are clouding prospects for the Canadian forestry industry in the next year.
Wood manufacturing in Canada
With the third largest forest coverage in the world, it is not surprising Canada’s wood manufacturing sector is one of the largest in the world. In 2022, the wood manufacturing industry1 employed 97,000 people, or 0.5% of total employment in Canada. It contributed C$20 billion2 to Canadian GDP, 0.8% of total 3. The sector is primarily located in rural areas, where local communities rely heavily on the sector for their economic survival.
In the last 10 years, the sector has experienced a shift to the production of higher-value added wood products. Veneer, plywood, and engineered wood products output has more than doubled since 2012 and was the largest segment of the industry in 2022 with a 37% share of output.
1. This sector is concerned with the primary processing of wood and does not include secondary activities such as the manufacture of furniture or paper. There are three industry groups in this subsector, comprising establishments engaged in sawing logs into lumber and similar products, or preserving these products; making products that improve the natural characteristics of wood, by making veneers, plywood, reconstituted wood panel products or engineered wood assemblies; and making a diverse range of wood products, such as millwork.
2. https://cfs.nrcan.gc.ca/statsprofile/economicimpact/CA
3. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3610022201
At the same time, output in establishments engaged in sawing logs into lumber and wood preservation has declined slightly, and now has a 29% share of output. A contributing factor to this decline was the expiration of the 2006 US-Canada Softwood Lumber Agreement in October 2015. This resulted in countervailing duties and anti-dumping tariffs being placed on Canadian softwood lumber exports to the US.
Fig 1: The wood product manufacturing sector’s contribution to Canadian GDP (at basic prices)
With the third largest forest coverage in the world, it is not surprising Canada’s wood manufacturing sector is one of the largest in the world. In 2022, the wood manufacturing industry1 employed 97,000 people, or 0.5% of total employment in Canada. It contributed C$20 billion2 to Canadian GDP, 0.8% of total 3. The sector is primarily located in rural areas, where local communities rely heavily on the sector for their economic survival.
In the last 10 years, the sector has experienced a shift to the production of higher-value added wood products. Veneer, plywood, and engineered wood products output has more than doubled since 2012 and was the largest segment of the industry in 2022 with a 37% share of output.
1. This sector is concerned with the primary processing of wood and does not include secondary activities such as the manufacture of furniture or paper. There are three industry groups in this subsector, comprising establishments engaged in sawing logs into lumber and similar products, or preserving these products; making products that improve the natural characteristics of wood, by making veneers, plywood, reconstituted wood panel products or engineered wood assemblies; and making a diverse range of wood products, such as millwork.
2. https://cfs.nrcan.gc.ca/statsprofile/economicimpact/CA
3. https://www150.statcan.gc.ca/t1/tbl1/en/cv.action?pid=3610022201
At the same time, output in establishments engaged in sawing logs into lumber and wood preservation has declined slightly, and now has a 29% share of output. A contributing factor to this decline was the expiration of the 2006 US-Canada Softwood Lumber Agreement in October 2015. This resulted in countervailing duties and anti-dumping tariffs being placed on Canadian softwood lumber exports to the US.
Fig 1: The wood product manufacturing sector’s contribution to Canadian GDP (at basic prices)
A significant proportion of the wood manufacturing sector’s production is exported. In 2020, 67% of Canada's softwood lumber production was sold to customers abroad.4 The US is by far the largest export destination, making up 89% of manufactured wood products exports in 2022. Japan is the next biggest export market, accounting for 5% of Canada’s manufactured wood products exports.
The sector has promising long run growth trends. As a renewable resource, wood is expected to become an increasingly popular building material. A life cycle comparison study found that a wooden house has 23% less embodied energy than a sheet metal house and 120% less than a concrete house5.
Moreover, the development of “mass timber”, a material which can substitute for steel and concrete presents additional opportunities for the sector (e.g., for use in high- to medium-rise buildings). There are also other promising applications for wood composites, including acting as a replacement for plastics in manufacturing products.
4. https://www150.statcan.gc.ca/n1/en/daily-quotidien/220711/dq220711b-eng.pdf?st=K01h4AI_
5. https://wood-works.ca/wp-content/uploads/publications-IBS4_Sustainability_SMC_v2.pdf
A significant proportion of the wood manufacturing sector’s production is exported. In 2020, 67% of Canada's softwood lumber production was sold to customers abroad.4 The US is by far the largest export destination, making up 89% of manufactured wood products exports in 2022. Japan is the next biggest export market, accounting for 5% of Canada’s manufactured wood products exports.
The sector has promising long run growth trends. As a renewable resource, wood is expected to become an increasingly popular building material. A life cycle comparison study found that a wooden house has 23% less embodied energy than a sheet metal house and 120% less than a concrete house5.
Moreover, the development of “mass timber”, a material which can substitute for steel and concrete presents additional opportunities for the sector (e.g., for use in high- to medium-rise buildings). There are also other promising applications for wood composites, including acting as a replacement for plastics in manufacturing products.
4. https://www150.statcan.gc.ca/n1/en/daily-quotidien/220711/dq220711b-eng.pdf?st=K01h4AI_
5. https://wood-works.ca/wp-content/uploads/publications-IBS4_Sustainability_SMC_v2.pdf
Prospects for the sector
As the sector is mostly used in construction of houses, housebuilding activity is the primary driver of demand in the sector. An estimated 90% of homes in North America are wooden framed.6 High demand from home building and renovation market meant that in 2021, real GDP in the wood product sector increased by 10%, double the growth rate of the total economy (5%).
Given that we expect single home housebuilding to decline in 2023 (by 1% in Canada and 17% in the US), 2023 will be a challenging year for the industry.7 Our central forecast is for Canadian wood product output to decline in real terms by 5% in 2023 and 0.1% in 2024.
6. https://www.cdhowe.org/sites/default/files/2021-12/Commentary_542_0.pdf
7. Single family housebuilding is more likely to be timber construction
Figure 2: Forecasts for single family unit residential construction
As the sector is mostly used in construction of houses, housebuilding activity is the primary driver of demand in the sector. An estimated 90% of homes in North America are wooden framed.6 High demand from home building and renovation market meant that in 2021, real GDP in the wood product sector increased by 10%, double the growth rate of the total economy (5%).
Given that we expect single home housebuilding to decline in 2023 (by 1% in Canada and 17% in the US), 2023 will be a challenging year for the industry.7 Our central forecast is for Canadian wood product output to decline in real terms by 5% in 2023 and 0.1% in 2024.
6. https://www.cdhowe.org/sites/default/files/2021-12/Commentary_542_0.pdf
7. Single family housebuilding is more likely to be timber construction
Figure 2: Forecasts for single family unit residential construction
The sector has experienced a shift to the production of higher-value added wood products
Risk modelling
Recent data indicates that the housing market is cooling with US residential construction spending falling 10% between March 2022 and March 2023 and housing starts by 20%. We model the impact on Canadian wood manufacturing under a “house price and other assets price crash” scenario, where relative to our central forecast, core inflation falls slowly. This leads to aggressive tightening of monetary policy in 2023, with the Canadian and US central bank rate in 2023 being 88 bps higher than our central forecast. Given its reliance on the housing market, wood manufacturing is especially vulnerable to tightening monetary policy (which restricts the availability of mortgages and raises the costs of mortgage interest rates).
The results suggest that under this scenario, wood manufacturing would be more negatively affected than the overall economy (Fig 3.) The scenario results suggest that the impact would be felt most keenly in 2025, with Canadian manufactured wood output being 6.6% below what it otherwise would have been.
Wood manufacturing is especially vulnerable to tightening monetary policy
Fig 3. Asset price crash scenario, difference in real value added relative to baseline
Recent data indicates that the housing market is cooling with US residential construction spending falling 10% between March 2022 and March 2023 and housing starts by 20%. We model the impact on Canadian wood manufacturing under a “house price and other assets price crash” scenario, where relative to our central forecast, core inflation falls slowly. This leads to aggressive tightening of monetary policy in 2023, with the Canadian and US central bank rate in 2023 being 88 bps higher than our central forecast. Given its reliance on the housing market, wood manufacturing is especially vulnerable to tightening monetary policy (which restricts the availability of mortgages and raises the costs of mortgage interest rates).
The results suggest that under this scenario, wood manufacturing would be more negatively affected than the overall economy (Fig 3.) The scenario results suggest that the impact would be felt most keenly in 2025, with Canadian manufactured wood output being 6.6% below what it otherwise would have been.
Wood manufacturing is especially vulnerable to tightening monetary policy
Fig 3. Asset price crash scenario, difference in real value added relative to baseline
Forest fires
While fires are a natural part of the forest ecosystem, they threaten the health and safety of forestry employees and assets, posing a growing risk to the sector.
Increased prevention methods and awareness has helped reduce the average to 7,300 fires a year for the last 25 years, compared to the 1980s-1990s, which averaged 8,000-10,000 fires a year. However, despite the decrease in frequency, wildfires have become more damaging. Between 1983-1992, fires burned an average of one million hectares of land, increasing to over two million between 1993-2002, and growing to 2.8 million hectares between 2013-2022. Rising temperatures related to climate change are likely to cause larger and hotter fires that spread more rapidly. Fires across Canada have burned 4.7 million hectares of land as of 14 June, and 2023 is likely to see the most land burned in a season on record.
A persistent and growing risk to the sector, fires destroy timber resources, shut down sawmills, and hamper supply chains. The shutdown of sawmills causes lumber prices to rise, sets back production and creates delays for customers.
While fires are a natural part of the forest ecosystem, they threaten the health and safety of forestry employees and assets, posing a growing risk to the sector.
Increased prevention methods and awareness has helped reduce the average to 7,300 fires a year for the last 25 years, compared to the 1980s-1990s, which averaged 8,000-10,000 fires a year. However, despite the decrease in frequency, wildfires have become more damaging. Between 1983-1992, fires burned an average of one million hectares of land, increasing to over two million between 1993-2002, and growing to 2.8 million hectares between 2013-2022. Rising temperatures related to climate change are likely to cause larger and hotter fires that spread more rapidly. Fires across Canada have burned 4.7 million hectares of land as of 14 June, and 2023 is likely to see the most land burned in a season on record.
A persistent and growing risk to the sector, fires destroy timber resources, shut down sawmills, and hamper supply chains. The shutdown of sawmills causes lumber prices to rise, sets back production and creates delays for customers.
Industry relevant issues
Conservationism:
Protecting Canada’s vast forests is a significant priority for environmental activists. Protesters in 2021 used disruptive tactics such as blocking roads and chaining themselves to trees in British Columbia to oppose old-growth logging; over one thousand demonstrators were arrested throughout the year. The issue remains potent as the British Columbia government has been slow to implement the recommendations in its 2020 old-growth strategic review. The federal government has lobbied US state legislators and the European Union to alter proposed laws on sourcing sustainable wood to protect Canada’s forestry interests, which has drawn criticism from Green Party MPs, MEPs, and environmental groups. Preventing deforestation will continue to attract significant attention as climate activists are increasingly willing to use more aggressive and disruptive tactics to stop logging.
North American lumber trade disputes:
Integrating US and Canadian supply chains in important sectors is a key bilateral priority for Washington and Ottawa, presenting opportunities for Canadian businesses. However, trade disputes between the two countries remain difficult to resolve. A long-running dispute over softwood lumber escalated when the US introduced new tariffs in 2021 and Canada challenged the duties in 2022 under the dispute resolution mechanism of the USMCA, the framework underpinning North American trade. Dispute resolutions failed under NAFTA, and political sensitivities in the US, Canada, and Mexico have tested the USMCA dispute resolution mechanism in the past two years and will likely hamper resolution of the softwood lumber issue. However, lawmakers in all countries are eager to preserve the North American market for economic and geostrategic reasons. Businesses will likely face lowered trade risks and greater long-term stability as the USMCA dispute resolution system continues to mature.
Conservationism:
Protecting Canada’s vast forests is a significant priority for environmental activists. Protesters in 2021 used disruptive tactics such as blocking roads and chaining themselves to trees in British Columbia to oppose old-growth logging; over one thousand demonstrators were arrested throughout the year. The issue remains potent as the British Columbia government has been slow to implement the recommendations in its 2020 old-growth strategic review. The federal government has lobbied US state legislators and the European Union to alter proposed laws on sourcing sustainable wood to protect Canada’s forestry interests, which has drawn criticism from Green Party MPs, MEPs, and environmental groups. Preventing deforestation will continue to attract significant attention as climate activists are increasingly willing to use more aggressive and disruptive tactics to stop logging.
North American lumber trade disputes:
Integrating US and Canadian supply chains in important sectors is a key bilateral priority for Washington and Ottawa, presenting opportunities for Canadian businesses. However, trade disputes between the two countries remain difficult to resolve. A long-running dispute over softwood lumber escalated when the US introduced new tariffs in 2021 and Canada challenged the duties in 2022 under the dispute resolution mechanism of the USMCA, the framework underpinning North American trade. Dispute resolutions failed under NAFTA, and political sensitivities in the US, Canada, and Mexico have tested the USMCA dispute resolution mechanism in the past two years and will likely hamper resolution of the softwood lumber issue. However, lawmakers in all countries are eager to preserve the North American market for economic and geostrategic reasons. Businesses will likely face lowered trade risks and greater long-term stability as the USMCA dispute resolution system continues to mature.
Advice for businesses
The Canadian wood manufacturing industry is currently very reliant on both the US as a market and housebuilding as an industry. This means that events including a depreciation of the US dollar against the Canadian dollar, a house price crash, or greater US protectionism will have significant negative implications for the industry.
Efforts to build new customer bases outside the US would help to mitigate against these risks. Emerging markets such as India are often significant net importers of wood, and though housebuilding with wood is a recent phenomenon in these countries, interest is growing8.
Businesses could also look to extract more value from trees by increasing current and future markets for Canadian wood products. This could be done by harnessing innovative technologies to diversify into new, higher value markets that make high-end industrial and consumer products. Making use of “waste” wood products and converting these into heat, plastics, and non-toxic chemicals is also an economically and environmental advantageous option. Alongside the growth possibilities that come with expanding into new markets, businesses also benefit from having a more diversified customer base.
8. https://www.tradecommissioner.gc.ca/canadexport/0006563.aspx?lang=eng
9. https://natural-resources.canada.ca/our-natural-resources/forests/sustainable-forest-management/forest-management-certification-canada/17474
10. https://financialpost.com/commodities/agriculture/extreme-supply-chain-snafus-hit-lumber-industry-forcing-output-curbs-as-prices-hover-near-record
Business should also be proactive in developing and communicating their climate credentials, highlighting the environmental benefits of using wood as a construction product (three quarters of Canada’s forest land is certified to at least one sustainable forest management standard)9.
Lastly, taking measures to improve supply chain resilience may also yield results in the future. In recent years, many businesses could not fully benefit from the surge in demand for wood products, largely due to shortages in rail transport. In some instances, lack of inventory capacity meant that production was curtailed10. Building relationships with alternative transport providers and ensuring the supply chain can flexibly shift between different modes of transport may be a sensible mitigating action.
The Canadian wood manufacturing industry is currently very reliant on both the US as a market and housebuilding as an industry. This means that events including a depreciation of the US dollar against the Canadian dollar, a house price crash, or greater US protectionism will have significant negative implications for the industry.
Efforts to build new customer bases outside the US would help to mitigate against these risks. Emerging markets such as India are often significant net importers of wood, and though housebuilding with wood is a recent phenomenon in these countries, interest is growing8.
Businesses could also look to extract more value from trees by increasing current and future markets for Canadian wood products. This could be done by harnessing innovative technologies to diversify into new, higher value markets that make high-end industrial and consumer products. Making use of “waste” wood products and converting these into heat, plastics, and non-toxic chemicals is also an economically and environmental advantageous option. Alongside the growth possibilities that come with expanding into new markets, businesses also benefit from having a more diversified customer base.
8. https://www.tradecommissioner.gc.ca/canadexport/0006563.aspx?lang=eng
9. https://natural-resources.canada.ca/our-natural-resources/forests/sustainable-forest-management/forest-management-certification-canada/17474
10. https://financialpost.com/commodities/agriculture/extreme-supply-chain-snafus-hit-lumber-industry-forcing-output-curbs-as-prices-hover-near-record
Business should also be proactive in developing and communicating their climate credentials, highlighting the environmental benefits of using wood as a construction product (three quarters of Canada’s forest land is certified to at least one sustainable forest management standard)9.
Lastly, taking measures to improve supply chain resilience may also yield results in the future. In recent years, many businesses could not fully benefit from the surge in demand for wood products, largely due to shortages in rail transport. In some instances, lack of inventory capacity meant that production was curtailed10. Building relationships with alternative transport providers and ensuring the supply chain can flexibly shift between different modes of transport may be a sensible mitigating action.
This report has been developed for QBE by Control Risks and Oxford Economics
This report has been developed for QBE by Control Risks and Oxford Economics
Building Supply Chain Resilience
Understand and manage risk in your supply chain
More like this
Sign-up to be notified about future articles from the Sector Resilience Series, and other thoughts, reports or insights from QBE.
Subscribe now