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The West Fraser Timber sawmill in Quesnel, B.C., in December, 2010. The B.C. lumber industry is forecast to fall short of U.S. demand.

JOHN LEHMANN/The Globe and Mail

Plans by West Fraser Timber Co. Ltd. and Canfor Corp. to close sawmills in the B.C. interior have raised concerns that lumber output in the region will lag demand driven by a rebound in the U.S. housing market.

B.C. interior sawmills operated by firms such as West Fraser and Canfor have been largely relying on timber left over from years ago, when mountain pine beetles decimated forests in the region. The infestation of pine beetles began in the late 1990s and peaked in 2005.

The upcoming mill closings and the prospect of further declines in timber supplies from the B.C. interior helped boost lumber prices Friday. But longer-term lumber exports will be crimped just as demand for forest products increases from the U.S. housing industry, adding to strong buying from China. With large swaths of beetle-infected trees harvested over the years, the supply of damaged timber is declining and there are also annual limits on allowable cuts for the remaining healthy trees in the B.C. interior.

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"Once the U.S. gets back to its normal housing activity, the B.C. interior will be producing 5 billion board feet less a year than it produced in 2005," CIBC World Markets Inc. analyst Mark Kennedy said in an interview.

Lumber output from the B.C. interior is forecast to be less than 12 billion board feet this year, down from peak production of more than 15 billion board feet in 2005. At the end of this decade, mills in the region will likely produce less than 10 billion board feet a year of lumber, as the focus shifts back to primarily sourcing new log supplies, undamaged by beetles.

Mr. Kennedy expects another four or five mills might close over the next four years or so, though he doesn't envisage additional closings in the area by West Fraser and Canfor in the foreseeable future.

West Fraser reports its third-quarter financial results Monday. Canfor will release its quarterly report Thursday.

"The peak infestation has died off, but a lot of the beetle-kill wood that's being harvested now has been dead for 10 years in some cases," Mr. Kennedy said. "The longer the tree has been dead, the less useable it becomes. The logs get so degraded that they bust up so much and create so much waste in your mill that the mill can't be run efficiently. A mill would have to use at least 50 per cent green timber with the beetle-kill wood to make a sawmill work."

On Thursday, West Fraser announced that it will close its mill in Houston, B.C., by mid-2014, while Canfor plans to shut down its mill in Quesnel, B.C., next March. But the two companies have agreed to exchange forest tenure rights, with the result being that West Fraser's Quesnel mill and Canfor's Houston mill will emerge healthier than today, when the companies are competing in both markets and struggling to cope with limited timber supplies.

"There is only so much wood fibre out there," Mr. Kennedy said. "West Fraser and Canfor basically recognized where they have a weak position, and they're shoring up where they have a stronger position. West Fraser will pick up more fibre to support its Quesnel mill and have one fewer competitor, and it's a similar thing for Canfor in staking out territory in Houston."

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With timber becoming increasingly scarce due to the ripple effect from the damage left by beetles, that prompted West Fraser and Canfor to reach a deal to exchange harvesting rights, Mr. Kennedy said. "They're not closing the sawmills because they think they can have more pricing power. They're doing it because they don't have enough logs to feed them."

The shutdown of West Fraser's Houston mill will affect 225 workers and Canfor's Quesnel closing will affect 209 employees. Canfor said its Quesnel staff will be offered positions elsewhere in the company, while West Fraser will help the Houston workers transfer to the firm's other mills, where possible.

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