CIBC slams 'perplexing' NB refusal to raise timber royalties during record lumber price surge

New Brunswick is digging in on its decision not to raise royalty rates on crown timber to take advantage of record prices for lumber, even though records show it has lowered royalties in response to weak lumber prices in the past.

As well, a top industry analyst says the province is preventing other sellers from getting better prices for their own wood.

Last week in an appearance on the CBC political panel, New Brunswick Natural Resources and Energy Development Minister Mike Holland said the province is not raising timber royalties on forestry companies as lumber prices across North America surge, in part, because it did not lower them during tough times.

"The conversation is around why don't we raise them when the price is good, but the conversation never centres around lowering them when there are hits to industry and the price is low," he said.

"There was no hue and cry to decrease them when times were bad."

But records show New Brunswick has adjusted royalty rates up and down based on economic conditions many times, often responding to tough markets with discounts

According to regulations on file with the province, New Brunswick dropped crown royalty rates charged on spruce, fir and pine sawlogs by 12.9 per cent in late June 2008 following a decline in North American lumber prices triggered by a collapse in US housing starts.

One year later, in June 2009, New Brunswick cut royalty rates on softwood sawlogs again by another 10.6 per cent following continued weakness in lumber markets.

Nevertheless, Holland said it is not the province's practice to adjust timber royalties to respond to what could be temporary market swings in lumber and he would need more evidence that the year–long escalation in prices is not a short term event.

"I have no issue with talking about pricing reflecting something that benefits the province of New Brunswick but it can't be chasing a trend. It can't be following an anomaly," said Holland

A request to interview Mike Holland about why royalties were dropped for two years in weak markets in 2008 and 2009 and not raised now in strong markets was not granted.

In an email, department spokesperson Nick Brown acknowledged lumber prices were used in those years as a "signal" to justify royalty rates being lowered, but said market prices for forest products are normally not part of the royalty formula used for timber.

He said that could change if lumber prices stay high for an unspecified period.

"The Minister has recently stated that commodity prices can fluctuate and if the cost of wood is to remain at these levels, long term, he would re-examine the file," wrote Brown.

Several provinces have been taking advantage of record lumber pricing to earn millions of dollars more from Crown timber cut by forestry companies and have barely dented their profits while doing it.

Last week, Canada's largest lumber producer, West Fraser Timber Co. Ltd., reported record earnings of $609 million before tax from its lumber operations for the first three months of 2021, a stunning $592 million increase from one year earlier.

The company said the profits came despite paying higher rates for Crown and privately purchased wood it uses at mills in British Columbia, Alberta and Ontario.

"(Wood) costs for our B.C., Alberta, and Ontario lumber and Engineered Wood Products operations are expected to remain elevated as long as lumber, and Engineered Wood Products prices remain high...." reported the company.

In New Brunswick, critics charge the province isn't just foregoing millions of dollars in revenue for itself by not raising royalty rates, but is setting a price ceiling for wood that blocks others from being able to get better prices for what they sell.

Acadian Timber Corporation of Edmundston is the second largest non-Crown owner of forest property in New Brunswick behind JD Irving Ltd..

Acadian sells timber to mills for both pulp and lumber processing and was facing criticism last week for being unable to get better prices for its wood given what's happening in other provinces.

"Sawlog pricing appreciation in New Brunswick has underwhelmed despite record lumber markets," said a report issued by CIBC Capital markets in its rating of Acadian as an "underperformer" company largely because of prices it's getting for wood it sells

"Log prices in New Brunswick have been sluggish due to the provincial government's perplexing decision to leave royalty rates on Crown timber unchanged for the past six years." said the report

Hamir Patel with CIBC's Vancouver office wrote the assessment. On Acadian Timber's quarterly conference call, he pressed the company for an explanation of why New Brunswick, which owns half the commercial forest in the province, is unwilling to raise royalties in such a hot market.

"It seems like there's a landlord in the province that doesn't want to collect their rents," said Patel.

"It almost seems like a better approach would be to just simply refuse to sell at these prices," he said

Current royalty rates for timber in New Brunswick have been in place since July 2015.

At the time they came into force, lumber futures on the Chicago Mercantile exchange were trading below $250 US per thousand board feet. It was the lowest price point for lumber of the last nine years and about 80 per cent below where prices have rocketed to this year.