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Canadian lumber producers reject rumoured U.S. calls for return to quotas

Lumber moves along a conveyor belt during processing at the West Fraser Timber Co. sawmill in Quesnel, British Columbia, Canada, on Friday, June 5, 2015.

David Ryder/Bloomberg

Canadian forestry company executives are eager for a new softwood lumber agreement but say they are not interest in a rumoured U.S. proposal to reinstate across-the-board quotas.

Resolute Forest Products chief executive Richard Garneau says word surfaced last week that the U.S. is seeking quotas that would put a hard cap on how much lumber could be exported to that country.

It's a position that has long been advocated by the influential U.S. Lumber Coalition, but a non-starter for Canadian producers who don't want to be constrained as demand grows amid a recovery in U.S. housing construction.

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Garneau said producers in Central Canada should be able to trade freely into the U.S. because wood costs are now at market levels following changes since 2013 to Quebec's forestry regime.

"We have now the highest wood costs, so there's no reason why we should have a quota," Garneau said in an interview.

Western lumber producers have also opposed a quota-based structure either in their quarterly conference calls or in testimony before a parliamentary committee.

Interfor CEO Duncan Davies said quotas systems don't work well when markets and currencies are weak.

"When markets are weak it tends to exacerbate (problems in) the pricing structure because people push volume regardless of price just to maintain their quota position," he recently told analysts.

Davies said quotas didn't work in the 1996 deal that limited Canadian exports to 14.7 billion board feet (34.7 million cubic metres) a year because of challenges in allocating them and the response of producers.

In 2006, Canada and the U.S. signed a nine-year agreement that set aside lawsuits and punitive tariffs against imported wood from Canada by imposing taxes up to 15 per cent on exports if lumber prices were below set levels. Producers in Saskatchewan, Manitoba, Ontario and Quebec chose a lower tax plus a quota. No penalties are paid if wood prices exceed US$355 per thousand board feet.

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Davies, who is also co-chairman of the B.C. Lumber Trade Council, told MPs that free trade is not an option. He said the choice is between managed trade and litigation because the U.S. has the right under to control access to its market.

Consequently, he said the best option is to modernize the 2006 agreement's tax-based system to address extreme fluctuations in the value of the loonie.

Prime Minister Justin Trudeau and President Barack Obama vowed in March to begin 100 days of talks designed to reach a new agreement. Halfway through the process, the Canadian government wouldn't say if any progress has been made.

The two sides are under pressure to reach a deal before October, a one-year period since the agreement expired in which neither side can take punitive actions.

"Given the U.S. election cycle, in the absence of significant progress over the next six weeks, it seems unlikely that much can be accomplished before the standstill expires (in October)," Hamir Patel of CIBC World Markets wrote in a report.

The Americans could then launch a trade case against Canada and impose duties early in 2017 that would be retroactive to October 2016, he said.

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"As such, it is possible be would see significant lumber capacity curtailments in Eastern Canada in late 2016," he added.

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