Currency boost.

Byline: Joe Harwood The Register-Guard

Long accustomed to economic gloom, Oregon's lumber mill owners are savoring some unexpected good times.

Prices paid for lumber from mills in Oregon and nationwide are on the upswing this month, rallying 12 percent since mid-May amid reduced lumber imports from Canada and Europe and a strong housing market driven by 40-year low interest rates.

After enduring prices at decade-long lows for most of the year despite the healthy residential construction market, U.S. mill owners are welcoming the price increase.

"Since about June 1, the market has made a pretty good turnaround," said Rick Re, general manager at Seneca Sawmill in Eugene. "That 10 or 12 percent is huge for us."

A combination of factors is propelling the run-up: a weakening U.S. dollar that discourages imports; widespread U.S. production curtailments and sawmill closures; and a 27 percent tariff slapped on Canadian lumber by the Bush administration 13 months ago.

The declining value of the U.S. dollar relative to the Canadian dollar and the euro is the big driver behind the shift.

The Bush administration has done nothing to try to halt the decline of the dollar, arguing that a weak dollar will spur manufacturing growth in the lackluster U.S. economy.

Wood products manufacturing remains an important component of Lane County's economy, employing 4,900 workers, many at above-average wages.

Since the beginning of the year, the Canadian dollar has increased 15.8 percent against the dollar while the euro gained almost 12 percent in value against the greenback.

Worth about 63 cents in January, the Canadian dollar last week was valued at almost 74 cents. The currency hit a high of 75 cents in mid-June.

The exchange-rate shift has chipped away at Canadian sawmill profits that were already razor thin because of chronic low worldwide lumber prices and the 27 percent duty. And given the oversupplied market, attempts by Canadian producers to raise their wholesale prices in U.S. dollars to offset the rise in the value of the Canadian dollar largely fell flat.

"Their return has dropped 15 percent," Re said.

That's led Canadian mill owners to idle plants, decrease production and fire workers.

The impact has been noticeable. Through April, Canadian imports are down 9 percent, said Butch Bernhardt Jr. of the Portland-based Western Wood Products Association. Lumber imports from central and eastern Canada, which make up about half the Canadian volume shipped to the United States, are down almost 15 percent, Bernhardt said.

The euro's strength against the dollar also shrank profit margins and forced many European producers to pull back from the U.S. market. Imports from Europe are down 24 percent through April, Bernhardt said.

European lumber shipments into the U.S. began increasing in the late 1990s as foreign firms took advantage of a strong dollar. But with the greenback losing steam - a euro cost 98 cents last October, and now it costs $1.15 - producers in Europe are sending fewer boards across the Atlantic.

The root of the sluggish pricing picture lies in a worldwide oversupply of lumber. Rampant overproduction has caused the glut, leading to poor prices that persisted in 2002 despite U.S. lumber consumption that hit an all-time annual high of 56 billion board feet.

"If you look at the market long term, the trend line has been going down since 1999," said Shawn Church, editor of Random Lengths, a Eugene-based newsletter that tracks wood products markets. "There's just too much supply on a global scale."

With more boards than buyers, prices for framing lumber dropped 31 percent from May 2001 to April of this year, according to Random Lengths.

Domestic producers blame much of the glut on Canada, the largest shipper of lumber into the United States. Canada produces about 35 percent of all lumber consumed here.

The two countries have long fought over how Canada sells publicly owned timber to its sawmills.

U.S. lumber producers argue that Canada subsidizes its lumber industry by selling timber-cutting rights at below-market prices.

To counter the subsidy, the Bush administration last year imposed a tariff on Canadian softwood lumber shipped into the United States.

The administration also argued that Canadian mills are illegally dumping lumber on the U.S. market at prices below the cost of production, and slapped an anti-dumping duty on the lumber. The duties add up to a 27 percent tax.

U.S. officials hoped the tariff will help American mills by making Canadian lumber more expensive and thereby slowing its southward flow. Instead, the ploy backfired when many of the larger Canadian mills increased production and imports in an effort to lower their per-unit costs.

The anti-dumping duty "so incensed the Canadians that some ultimately adopted a last-man standing approach to the market, contributing to its overproduced state," Church wrote in a recent Random Lengths article.

Though U.S. sawmills during the past two years have slowed production and idled mills in response to the low prices, many Canadian sawmills kept running at full speed.

Seneca Sawmill in Eugene, for example, in April reduced its operations from three shifts to two, laying off 115 workers. The curtailment marked only the second time in the company's 50-year history that it laid off workers.

But the currency swings coupled with the duties and poor prices eventually caught up with Canadian sawmills.

"Despite the duties, despite the market, they continued to keep their mills going," Church said.

"It seemed like the decisive factor was when the Canadian dollar strengthened significantly against the U.S. dollar."

Since early spring, as the Canadian dollar surged, Canadian sawmills have been shutting down and reducing shifts, blaming the currency differential, the tariffs and the poor market.

"In the 27 years we've been involved in this dispute with Canadian lumber, this is the first time we've seen widespread curtailments of Canadian production," Re said.

Whether the price increase holds through the summer construction season remains to be seen.

Also unclear is whether sawmills in Oregon and elsewhere would dare ramp up production and hire more workers just when the chasm between supply and demand is closing.

Church said the market has shown in the past month that it has legs under it.

"But you've got to remember that prices are coming up from 10-year troughs," he said.

CAPTION(S):

Shawn Adams secures a load of lumber on a railcar at Seneca Sawmill in Eugene. In April, the mill laid off 115 of its workers. Stephanie Barrow / The Register-Guard A stack of 2x6 studs awaits transport at Seneca Sawmill in Eugene.