It may not have grabbed global headlines like his attempts to repeal ‘Obamacare’ or impose immigration restrictions. However, another early move in Donald Trump’s US presidency is causing controversy and may have widespread impacts in the Canadian softwood lumber industry.

The President has rejected the current Softwood Lumber Agreement (SLA) between the countries and, until a new one is concluded, is imposing duty on Canadian imports.

The SLA was introduced in the 1980s and has been a subject of almost continuous dispute ever since. This is the fifth time the US has brought it back for renegotiation. “It’s now more often referred to as the Softwood Lumber Disagreement,” said Canadian analyst and commentator Russ Taylor, president of International Wood Markets Group of Vancouver. “But, while we’ve been here before, this time US sanctions are being applied more widely and resolution looks less predictable.”

Making Trump’s punitive action tougher to take is that it comes at a time when the Canadian softwood industry’s recovery from the US housing crash looked increasingly sure and forest devastation caused by mountain pine beetle past its worst. It also coincides with a decline in Canadian lumber imports in the industry’s second biggest export market, China.

“The view is that, from the fourth quarter 2018, the industry is in for tough times,” said Mr Taylor.

Some feel the Canadians can take comfort from the fact the lumber industry has battled tough times for a decade and is now down to its most resilient core. Others contend some mills remain fragile after the US building slump and pine beetle infestation and new market pressures could prove the last straw. Mr Taylor describes the worst days of the US downturn as ‘carnage’ for both American and Canadian lumber sectors.

The US construction sector was and remains by far the biggest outlet for Canadian lumber. But from its pre-recession peak of 2.07 million housing starts it slumped to 550,000 in 2009.

“Total North American lumber production halved in three years,” said Mr Taylor. “From its 2005 peak of 35.5 billion bd ft, Canadian lumber output bottomed out at 19.4 billion bd ft and its US exports fell from 22 billion bd ft to 8.3 billion.”

The result was not just Canadian mill ‘curtailments’, but the closure since 2006 of 25 plants.

Adding to the industry’s problems, Canadian housing starts also fell from 200,000 to about 150,000.

Since the 2009 low, however, the Canadian timber sector has been slowly recuperating. US housing starts have picked up to 1.17 million a year and are forecast to return to 1.5 million in 2020/21. Consequently 2016 Canadian lumber production was back to 28.5 billion bd ft, while its US exports hit 15 billion and total exports 19.34 billion.

With the US housing upturn gathering momentum, the Canadians were anticipating their timber exports to follow suit. But the SLA dispute threatens to halt progress. The nub of the issue, the Americans maintain, is that, whereas the vast bulk of their forest is private sector-owned, 90% of the Canadians’ is on so-called crown lands. The conclusion is that their timber supply is effectively subsidised. Canada disagrees. “If our raw material were subsidised, our mills must be achieving huge margins,” said Mr Taylor. “In fact highest North American mill margins are in the US south, where they’re achieving EBITDA of 30-40%. The lowest margin performers, in fact are in Eastern Canada, averaging 13-14% EBITDA.”

In reality, maintain some Canadians, what has really triggered US action now is the fall of the Canadian versus the American dollar. Whatever the cause of the dispute, its effects are starting to be felt. The US imposed preliminary countervailing duties on Canadian softwood imports on April 28. Anti-dumping duty, expected to be 10-15%, will follow in July and, after negotiation, a final combined duty figure will be announced next January, forecast at around 25%.

Fellow analyst Peter Woodbridge of Vancouver-based Woodbridge Associates Inc said the Canadian industry has not ‘overreacted’ to the initial US moves as they mirror those in previous disputes and negotiations are ‘following due process’. “In fact Canadian lumber stock prices rose on announcement of preliminary tariffs,” he said. “But it’s possible final anti-dumping findings and duty determinations will reverse mills’ so-far-so-good response. Imposition of US import quotas on western provinces, for example, would force Canadian exporters to rethink market strategies away from the US, causing lumber stocks to plummet.” Making this latest dispute potentially more damaging, duties cover previously exempt products, notably value-added manufactured goods. Further impacting this sector, this time there is no US$500 per 1,000 bd ft duty cap. Past SLA disputes have taken four to five years to settle, resolved with mixtures of quotas and other longer-term measures and with duty rates declining over the period. But there’s no guarantee this one will follow suit. In the meantime, the Canadian industry and authorities are looking to develop alternative markets. A recent mission promoted Canadian engineered or masstimber building expertise and materials in South Korea. Now the government is focused on new trade agreements with China. Joel Neuheimer, senior international trade director at the Forest Products Association of Canada, said that a push to grow the Chinese market during the last SLA dispute paid off. “From 2006 to 2016 we tripled exports to 15% of our total,” he said.

But Mr Taylor believes renewed focus on China will not significantly offset likely loss of US custom.

“Thanks to China’s stimulation measures, and Canada’s promotional efforts in the US downturn, our exports rose to 3.2 billion board feet,” he said. “But now we face stronger competition from European and particularly Russian softwood, and we’re down to 2.6 billion bd feet. Chinese house building is also no longer enjoying doubledigit growth.”

Growing Canada’s exports to other Asian markets is also seen as a challenge, with Japan reported ‘flat’ and Russian lumber gaining traction in South Korea.

“Renewed sales and technology transfer by Canada across Asia can be expected,” said Mr Woodbridge. “But these are also small volume compared to the US housing and remodelling sectors, which remain Canadian lumber’s Holy Grail.

Europe, meanwhile, has been a growing export destination, but also remains small scale. Its total imports of Canadian wood products were up from C$464.5m in 2015 to C$589.9m in 2016.

Interestingly the UK is Canada’s biggest European customer, with imports worth C$382.1m in 2016. However, the vast bulk of these were in wood fuel pellets. Mostly from British Columbia, these hit 1.6 million tonnes in 2016, worth C$276m. In the same year, the UK imported 51,912m3 of softwood lumber, worth C$11.9m, 286,636m2 of shingles and shakes, at C$6.2m, and 13,208m3 of plywood, worth C$11.2m.

Expanding Canada’s European markets significantly would be complex, said Mr Woodbridge.

“Most commodity western spruce-pine-fir lumber is designed for the less-demanding North American market. Meeting European standards would take a generation-long manufacturing cultural change.”

Looking to the short to medium-term, said Mr Taylor, the Canadian timber sector will have to tighten its belt. This is not just down to US duties, but also residual supply effects of the mountain pine beetle.

“Fewer new attacks are reported, mainly as the beetle has largely consumed its food source,” he said. “But it has left supply short for a lot of mills and we expect this and economic conditions to lead to four or five more closures in coming years.”

By 2019, the US housing recovery is expected to drive up demand for Canadian lumber, helping offset the impacts of duties. “Overall conditions should improve,” said Mr Taylor. “That’s provided there are no new conflicts, international political or economic crises, and President Trump behaves himself.”

There are added anxieties over the president’s aim to re-negotiate or even scrap the North American Free Trade Agreement. “Trade negotiators in Ottawa are burning the midnight oil on the softwood lumber spat, trying to get a deal done before the NAFTA hammer drops and it’s hard to say if they’ll succeed,” said Mr Woodbridge