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The Globe and Mail

Little beetle a big puzzle for Canadian lumber


Investors in Canada's forestry sector should pay attention to the speed skating competition at next year's Winter Olympics in Vancouver because it could help them with an insect problem.

Western Canada's mountain pine beetle infestation has left forestry firms with both the short-term problem of how to make money in a tough market from beetle-killed trees, and the long-term risk of a fibre shortage.

If the industry is lucky, the spectators at the 2010 Games will take their eyes off the athletes speeding around the skating oval and spend a few moments looking at the newly built facility's "wood wave" ceiling.

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It's made from trees killed by the beetles that spread through British Columbia's Interior region over the past decade - and have now jumped over the Rocky Mountains into Alberta.

The forest industry says "beetle wood" is as strong as normal lumber, but a blue stain caused by the insects make it harder to sell to some consumers worried about quality.

"People always ask: Do you use it? Now we can point at the (skating) oval ... and say, yes we do," said Doug Routledge of the B.C.-based Council of Forest Industries.

The facility will also allow the industry to show that wood can be used for larger commercial structures where architects might have favoured concrete or steel.

"It's a chance to get away from some of the dependency on residential construction," said Kevin Mason of Equity Research Associates.

British Columbia produces about half of Canada's softwood lumber exports, and the beetle infestation has hung like a sword of Damocles over producers such as West Fraser Timber Co. and Canfor Corp. since the late 1990s.

The tiny bugs, Dendroctonus ponderosae, are estimated to have killed up to 623 million cubic metres (22 billion cubic feet) of wood, or about 46 per cent of British Columbia's marketable pine, according to the province.

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The infestation is beginning to wane, but only because the supply of mature pine trees the beetles favour is dwindling.

Industry officials and analysts stress that the beetle's immediate impact on company balance sheets pales in comparison with the collapse of the U.S. housing market, which pushed Chicago Mercantile Exchange lumber futures this year to their lowest level in more than two decades.

But even as demand eventually begins to improve, analysts say the infestation could reshape the Canadian forestry sector, creating investment opportunities in some areas while damaging others. A key factor is the impact on timber supply.

The pine beetle could help boost lumber prices in the long term by limiting Canada's production capacity, Toronto-Dominion Bank economist Dina Cover said in a recent report.

Recent studies found that affected trees have a "shelf life" of eight to 12 years when they can economically be turned into lumber - four years longer than initially expected.

That means there should be plenty of timber available when demand starts to improve, as many expect, in the next year or two, said Paul Quinn, an analyst at RBC Dominion Securities.

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"We're talking five, seven 10 years out," Mr. Quinn said.

Potential long-term winners from tighter supplies include investors in timberland outside the infestation areas, Mr. Mason said. Canadian firms active in timberland investment include Brookfield Asset Management.

Possible long-term losers include mills. Tight supplies could eventually force the closure of eight to 12 sawmills, British Columbia's forest minister warned last month.

Ratings agency Standard & Poor's predicted in a recent credit report on West Fraser that the beetles will eventually shrink B.C.'s lumber industry by weeding out higher cost mills.

Beetle-killed trees present special problems for sawmills, because, as the dead tree sits in the forest, the wood becomes more brittle, which reduces the amount of lumber that can be harvested from each log.

New scanning technology helps mills handle the wood more efficiently, but with less lumber per log a mill's ability to process the trees can also depend on whether they have a market for the rest of the fibre, such as bioenergy.

Provincial officials have promoted the idea that the beetle infestation could be an opportunity - albeit unwanted - to expand British Columbia's alternative energy production.

Domtar, Canfor Pulp and Mercer International's Celgar unit all won approval in August to sell excess electricity from biomass facilities at their pulp mills that can use beetle wood residue.

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