Canfor Customer Update

Welcome to the second edition of the Canfor Customer Update. Thank you to all of our customers who took the time to provide feedback on the content and approach of these updates – we will work to refine them so they can be as useful as possible.

Sincerely,
Wayne Guthrie

Transportation Update

The winter of 2014 brought record snowfalls, excessively cold temperatures and, unfortunately, unprecedented transportation disruptions. It is not news to our North American customers that our ability to get product to market via the rail network has been severely strained in the last several months. We recognize this causes a ripple effect through the entire supply chain that relies on our products – starting with our customers and continuing on to their customers. Our Transportation and Sales Departments are working hard to find short-term solutions to alleviate the backlog and to develop longer-term strategies to relieve bottlenecks in our distribution chain.

Weather-related rail service disruptions should resolve by the middle of Q2, and Canfor transportation personnel are in daily contact with the service representatives at all the major railways to ensure we have a constant supply of rail cars to our facilities once operations resume at pace. We have been moving product between facilities based on rail loading capacity in order to maximize our out-loading ability, and to help us clean up our late orders as soon as possible.

We understand the challenges that this has caused for all our customers, and we appreciate your patience as we work with the railways while they resume their operations. We will continue to provide updates as information becomes available. In the meantime, questions regarding product deliveries can be directed to any of us at Canfor, including myself.

Today, we are singularly focused on shipping and cleaning up any late orders. We expect to be back to normal shipping later this month. Once there, we will take the time to analyze the situation and develop better contingencies for next year. Feel free to offer your opinion on how we could have handled this crisis better.

Market Outlook

North America

It is difficult to gauge the North American market right now because of these transportation bottlenecks. And while it is easy to blame the weather for all of our problems, I think most of us would agree demand was less than we had expected. As a result, prices peaked well below last year. Our plan was based on 1.075 million US starts, and while this may be in question with the slow start, we still expect to be close.

Prices have softened recently in what is a normal seasonal pattern, although perhaps a bit earlier than some expected. They should bottom a bit earlier than normal, and then start to recover. This year will likely follow the seasonal pattern of prices we saw over the last five years.

With steady offshore volume and 925K housing starts in the United States, we ended 2013 averaging 355.00 mill for 2x4 WSPF (Random Lengths). This was up 18 per cent over 2012.

We expect slightly better demand in the United States this year, and flat demand in Canada. There is some production pickup, but that is mostly offset by some permanent closures. So all in, one can make a case for slightly better average pricing in 2014.

Offshore markets

We expect offshore demand to remain stable this year, with supply restricted due to the closure of our Quesnel mill. All of our offshore markets were impacted by the labour disruptions that essentially shut down the Port of Vancouver. Thankfully at time of writing, things are returning to normal and we will be very busy this month cleaning up the backlog of late orders. This unfortunately could take several weeks.

China demand was in line with our business plan. Shipments were light due to the aforementioned transportation issues but this volume will be caught up in Q2. Despite all the talk of a slowdown in China, we continue to see steady demand. A few years ago, most of BC’s volume was low grade destined for Beijing and Shanghai. Today, rapidly expanding interior cities are extending the reach of SPF while an increased interest in higher-grade lumber for furniture and other value-added applications continues to evolve.

Japan is coming off a great year in 2013, and it is expected to moderate slightly this year. Most of our customers are focusing on the emerging wood-frame multi-family sector in Japan that will offset any weakness in single-family construction.

India

I recently participated in a trade mission to India to investigate opportunities in that country for wood products.

India is a large and growing economy and, much like China a decade ago, holds tremendous potential as the middle class grows and gains wealth, spurring development and construction. Unlike China, India already has a culture of wood use – tropical wood species are used extensively in construction and finishing applications in Indian homes. There is a growing awareness of green building, and a desire to build with wood for its environmental benefits – which presents an opportunity for North American lumber products.

One of the challenges faced in exporting SPF and SYP lumber to India is a lack of familiarity with North American species. A big part of our initial market development work is to provide information on the appropriate applications for SPF and SYP, as well as information on grades, strength and other physical properties.

The other major challenge is that the supply chain in India is hugely fragmented. There are currently several convoluted steps from port to end user which makes quality and service assurance next to impossible at this stage. We will search for ways to smooth out the supply chain and make the process more efficient and transparent so we can ensure that new customers in India get the right product for the right application, every time.

New Customer Portal Coming in July

Canfor is upgrading our lumber sales and inventory information management system. The current system – called “Advantage Access” – will be replaced with a new customer portal that will integrate with Canfor’s overall inventory database and offer real-time information on your orders and their status.

The new system will be a significant improvement over the existing Advantage Access system, providing easier access to more detailed information. We have built the new system with an eye to continuing to meet the needs of our existing users, but given the improvements in the information available through the system, we expect more customers will use the portal and find it a valuable resource.

The new customer portal will launch July 1, 2014. Between now and the launch, the Advantage Access system will remain available without disruption. Customers who have never used the Advantage Access system but would like to try the new portal can get a user ID from Frank Turnbull, General Manager North America Sales (frank.turnbull@canfor.com; 604-264-6285).