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Softwood lumber deal likely to expire

April 27 2015

Ross Marowits, The Canadian Press 
Published Friday, April 24, 2015

Canada's lumber producers fear the softwood lumber agreement with the United States will be allowed to expire in October, ending nine years of stability.

"As the period leading up to the softwood lumber agreement's expiry narrows, the likelihood of an extension or replacement occurring is reduced," West Fraser Timber (TSX:WFT) noted in its first-quarter report.

Industry analysts agree, with one describing the chances of a renewal this year as "slim to none."

"I just think both sides are just too far apart and they're just not going to get it done by October," said CIBC analyst Mark Kennedy.

An expiry would trigger a one-year standstill period when both countries are barred from taking unilateral action.

As the deadline approaches, softwood lumber duties are expected to increase to their highest level in nearly two years this summer.

After more than a year of no duties for western producers, a five per cent charge is being levied in April and May based on falling prices caused by the impact of poor weather in the first quarter and slow home construction. The duty would rise to 10 per cent in June and possibly July if prices fall further as expected.

Producers in Saskatchewan, Manitoba, Ontario and Quebec face a 2.5 per cent levy that could rise to three per cent.

However, a surge in U.S. housing starts is expected to boost demand and prices in the third quarter, eliminating export duties that have been imposed in 77 or the past 102 months.

Paul Quinn of RBC Capital Markets said every lumber producer that attended a conference last week believed the agreement would be left to expire, paving the way for negotiations ahead of the October 2016 "real deadline."

He said the U.S. government is focused on the Trans-Pacific Partnership agreement and has yet to really turn its sights on Canadian lumber.

And while a delay could make softwood lumber an issue in the 2016 presidential election, Quinn isn't sure it will garner much public attention compared with the fight over the Keystone XL pipeline.

"There's some crazy theories like Canada has taken it on the chin for pipelines so maybe the U.S. gives us a win on softwood lumber," Quinn said.

A spokesman for Canada's Department of Foreign Affairs, Trade and Development said the government has told the Americans that it prefers to renew the current deal.

"There is general agreement in Canada in the value of maintaining this predictability and stability which has resulted from the softwood lumber agreement," John Babcock wrote in an email.

Tembec (TSX:TMB) vice-president Paul Krabbe said Canada has a rare industry consensus that the deal should be renewed. He believes the door isn't entirely shut to the Americans agreeing to a renewal by this fall when the housing market is expected to improve.

He said the deal worked and saw the industry through the Great Recession and the collapse of the U.S. housing market.

Krabbe said it's not certain the Americans would give in to pressure from the U.S. Lumber Coalition and file a trade case against Canada when market conditions are improving.

"If you launch a trade action you need to demonstrate that you've been injured and the bar is pretty high to prove that there is actual harm coming to the United States," he said in an interview

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