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the lunch

Hank Ketcham has a confession. The chief executive officer of the world's top lumber producer, hewer of spruce, pine and fir, had a fake Christmas tree last year at the Vancouver home he shares with his wife.

"I'm getting to be an old geezer," Mr. Ketcham, 61, says over lunch at a casual and quiet Italian restaurant in Quesnel, the small city in the British Columbia Interior where 56 years ago his dad and two uncles started West Fraser Timber Co.

"You go to the goddamned tree lot. Invariably, it'll be raining, and kind of cold. You've got to pull one out, and hold it, and she's got to look at it from all sides, you get needles on you, and then all of a sudden you realize your hands are all sticky."

Mr. Ketcham's a pragmatic man, but he's hardly afraid to get his hands dirty. After university, he arrived in Quesnel in 1973 for a six-year stint in what was then a hard-drinking town, a day-long drive northeast of Vancouver.

Starting as an edger man in a sawmill, "I lost the company a lot of money, edged too much," Mr. Ketcham says, typical of the wry humour he often aims at himself and others. He recalls the "good old days," when the vast forests around Quesnel had not yet been decimated by the mountain pine beetle and the business of building American suburbs was rolling.

Come Fridays, workers immediately cashed their cheques and invested the proceeds at the local drinking hole, "the old Billy" - still operating, it was built to resemble the sternwheelers that once worked the Fraser River.

Strains of nostalgia may sprinkle the conversation, but Mr. Ketcham - after a quarter-century as CEO - has his focus firmly on the future. The Vancouver-based company - and its industry - has come through slaughter. West Fraser has emerged as the industry's titan, eclipsing once far-mightier names such as hometown rival Canfor and weakening Weyerhaeuser of Seattle.

Pain, as well as prospects of recovery, are evident on West Fraser's bottom line. The firm, which had barely ever lost money, suffered through a long losing streak - with red ink in 12 of 14 quarters to the end of 2009. Now, the company's on a small roll, posting three successive quarters of profit, despite a strong Canadian dollar and a moribund U.S. housing market. A decade ago, it was only one-third the size.

The emergence of a hungry new buyer in China has been a huge help. The value of B.C. forest products - lumber, pulp, paper, and so on - going to China and Japan is coming close to matching the value of goods sent south, buoyed by a near-doubling of sales of lumber headed for China.

And West Fraser is near full capacity, unlike Canfor and Weyerhaeuser, both of which have shuttered more than a third of their potential output.

Two years ago, during the economic collapse, "cash preservation" was the singular goal. Today, the industry is spending again. Last October, West Fraser announced planned capital spending of $125-million in 2011, raising that last month to $230-million. Canfor is also primed to spend, budgeting $145-million for 2011.

Some analysts predict lumber could make it to $500 for a thousand board feet, a rarely reached mark and more than 50-per-cent higher than the going rate. Daryl Swetlishoff at Raymond James is selling the theory of "peak lumber" and a "super spike" - evoking the language Goldman Sachs used in 2005 as oil really took off.

The super-spike thesis goes like this: The B.C. Interior, once a crucial supplier to the U.S., will see a permanently reduced harvest for several generations because of the mountain pine beetle. Meanwhile, demand from China is soaring. And even though the U.S. housing market is currently a disaster, demographics suggests that when recovery really comes it will be buoyant.

"It'll get very profitable," says Mr. Ketcham over a light lunch of soup, salad and diet Coke a week before Christmas. Normally, he'd have the baked lasagna, but was planning to nibble all afternoon at a company party.

"This is going to be a really good business to be in."

Investors seem to agree. West Fraser shares are near their all-time high, reached in 2004, and have climbed about 50 per cent in the past six months, after a decades-long war of attrition.

Back in 1954, there was a feeling of a gold rush amid the ocean of trees in the B.C. Interior as hundreds of tiny operators scrapped it out. Hank's uncles - Bill Ketcham and his younger brother Sam - were on a lumber buying and fishing trip. The sons of a Seattle forestry family saw profit in Canada. The next year, partnered with their brother Pete, Hank's father, they bought a small planer mill in Quesnel for $60,000. The 12-person operation - named West Fraser for their timber rights west of the Fraser River - posted a profit of $75,000 on sales of $410,000 that first year. Led by Sam, the cost-conscious operation quickly expanded, picking off its peers.

"We all grew up watching our parents make all these sacrifices for the company," says Mr. Ketcham. "In the early days, it was not a given that the company would survive. They plowed all the money back into the company."

After Sam died in a helicopter crash in 1977, Pete took over as chairman. In 1985, Hank became CEO, a year before the family-run company (still about 30-per-cent owned by the Ketchams) went public.

The company continued to expand, including a key $120-million new mill in Quesnel able to efficiently process deadwood, which arrives on site dry and cracked. It's their biggest mill.

In the mill, logs hurtle by - minutely and repeatedly scanned, the cuts quickly adjusted by computers to salvage as much high-quality wood as possible. Walking alongside, Mr. Ketcham says the changes since he was an edger man are "incredible. The game has completely changed. It's catastrophic if you haven't invested in your mills and maintained a strong balance sheet. We survive and pick up assets."

Outside, under blue sky and minus-10 C, amid fresh lumber wrapped in West Fraser packaging, he dismisses questions about the value of the brand. "This is like coal, or copper, a pure commodity," he says.

Mr. Ketcham's a value man. 'Keep costs low' is his maxim.

"People used to say, 'Why don't you go up the value chain?' A lot of people equate the value chain to just getting a higher price for your product." He notes that the selling price of exotic products might be higher - but so are production costs. "What value really is, is the margin between your cost and your selling price."

Raised in Seattle, he now has dual Canadian-U.S. citizenship and little time for criticism from weaker U.S. players that Canadian firms, especially in the B.C. Interior, are subsidized by lower-than-fair rates to buy timber from the Crown. The U.S. has filed a fresh softwood-lumber complaint in the London Court of International Arbitration, arguing there's no way producers could get so much good wood out of deadwood.

But Mr. Ketcham points to data compiled by the Forest Products Association of Canada that show B.C.'s wood sector labour productivity is $55 per hour worked, far higher than Quebec at $45 and the United States at $28.

"You see it in the mills. There's hardly anyone working in them. Highly productive. Highly capitalized. You go south of the border, you won't see the investments you see up here."

With lunch coming to an end, Mr. Ketcham's feeling good. Spinning a spoon in his hand over a cup of orange pekoe, no sugar, Bruce Springsteen's Cadillac Ranch playing, the pragmatic lumberman smiles: "All the stars are aligning for us," he says.

Spirits at the Quesnel office are festive, too, as the Christmas party gets going. Earlier in the day, Mr. Ketcham "awarded" one saleswoman a plaque for the lowest-priced lumber West Fraser has ever sold, $129 for a thousand board feet during the worst of the industry recession. The jest recognizes their survival. Many laughs are had.

He addresses the assembled sales team: "Since 1955 this company's been driven by cost. Because you can never control the price of lumber." He thanked them for fighting through, and saluted "a pretty good year."

"I know things get boring around here when the phones aren't ringing. They're ringing now."

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