December 8, 2015 – Duncan Davies, CEO Interfor – The BC Forest Industry

Duncan DaviesMr. Davies has been the President of Interfor since 1998 and Chief Executive Officer since 2000. Prior to joining the Company in 1998, Mr. Davies was a Vice President of an investment banking firm specializing in forest products transactions and activities, a principal in an independent forest products company and held senior positions in two other large forest products companies. He is the Chair of the B.C. Lumber Trade Council and First ViceChair of the Softwood Lumber Board. He is also a director of the Binational Softwood Lumber Council and the Canadian Lumber Trade Alliance. He holds a B.A. in Economics from the University of Victoria and a M.Sc. in Forestry Economics from the University of British Columbia.

He will speak on the challenges facing the BC forest industry (US lumber agreement, China, pine beetle, etc)

Notes on presentation of Duncan Davies by John Gunn

Gordon Armstrong introduced our guest speaker, Mr. Duncan Davies, President and CEO of Interfor Corporation, the fastest growing forest company in the world and the fourth largest such operation in the world.

Mr. Davies is clearly one of our very benign capitalists – one whose primary loyalty is to the shareholders of the company and in this pursuit he endeavours to enhance the share value, while at the same time and no less important he has a parallel concern with the welfare of the other stakeholders, namely the employees, the customers and the community at large, within which the company operates. Allocation of capital rather than company size for its own sake, appear to be his guiding principles. Towards this end he showed us why the expansion of the company into the USA and particularly into the state of Georgia, made eminent good sense at this point in time. Much of his talk concerned his own corporation but also related in many cases to the two other major corporations in this part of the business, namely Canfor and West Fraser. Incidentally Interfor is the successor to what started out as Sauder Lumber, a name very familiar to all of us in the Lower Mainland.
Mr. Davies opened his address, most appropriately, by pointing out that we were assembled for this meeting in the H.R. MacMillan Planetarium, and no one could have been more iconic in our forest industry than H.R. MacMillan himself. But how things have changed since his days in the business! Interfor has been expanding quickly, but not in BC as you might expect, but in the state of Georgia. He wants to show us why several of the major forest companies in BC are currently making their investments in the US South rather than here, and particularly in Georgia.
In H.R. MacMillan’s heyday the forest industry dominated the economy of BC. No longer, but it is still the largest segment of our industrial operation, especially if you include all the support business such as machinery and transport – for a total of about 30 billion dollars and about 145,000 jobs. We in Vancouver may not notice it as much, but in many of the small and medium size communities in BC this industry is still the major influence, and of course it is a huge factor in the tax revenues to the province and to many municipal governments.
Interfor produces over 3 billion board feet of lumber in its 18 mills – mills being located on the BC Coast, BC Interior and USA – with the USA South of these segments being the largest and being 40% of the total output. The company has doubled in size in the last two years and the target of the board is to double in size again by 2020.
Mr. Davies is justly proud of their Adams Lake sawmill, into which they invested over 100 million dollars in 2008 & 9 – a time of financial turmoil in the world and an investment which required great faith in their future. He suggests that this is one of the most effective and efficient mills in the world. It puts out around 350 million board feet. Another major investment has been their Grand Forks and Castlegar mills which they acquired around the same time, after the demise of Pope & Talbot and are now thriving mills.
The reasons for investing so much capital in Georgia are many, not least that it avoids complications to do with the SLA (Softwood Lumber Agreement) between Canada and USA. The other and well-known reason is the Pine Beetle – a truly giant disaster for the local industry. By the time it is all over, this beetle scourge will have destroyed no less than one third of the province’s entire standing timber. Admittedly, if the trees are sawn soon after the beetle attack, there is still value in the product as a building material in spite of the discolouration. But if left for a longer period the lumber from the trees is of much less value due to twisting and deformation. A very significant number of interior mills have had to close down due to lack of raw materials, mainly due to the beetle. Another reason Georgia appears attractive is the management of the land. In BC, our resource is almost all Crown land and it is not there just for the lumber industry – the government has to reckon with other claims on it – tourism, nature lovers, aboriginal land title, mining etc. Private forest land in Georgia has no such restrictions. In addition, quite simply, the trees grow much faster there. Here the aboriginal aspect creates great uncertainty and makes forward planning and investment difficult, and we really don’t know all the implications of a recent Supreme Court ruling. One of the attractions for business in Georgia and Arkansas is that the governments are friendly – friendly to anyone who will invest and create employment within the state. Also, the future of the SLA is uncertain and so the opening of the China market for our lumber has been a huge benefit and a good bargaining tool with the USA. The BC lumber industry has done a remarkable job in promoting our lumber and our building methods in China. Another route to improving the market, is changes in building codes and techniques – allowing much taller buildings to be primarily of wood – not the balloon structure we are familiar with in our houses and our typical three storey condo and commercial buildings but in the use of large laminates – so buildings will soon be heading up to well over 12 stories, with some major trial sites going ahead at UBC, on an 18 storey wood building.
The size of the China market is staggering – they expect to move around 200 million rural dwellers to urban settings in the next few years, and the housing need for these people is quite staggering. They are not moving to Shanghai, Beijing etc but to the second tier medium size cities of the interior.
Mr. Davies closed with a warning – which we, all of us, need to make clear to governments. We cannot carry on in the old way – among other things, we need from the governments, more clarity about aboriginal rights and environmental concerns and other contentious land matters. If not, the companies such as Interfor, West Fraser and Canfor will simply pick up their marbles and play business somewhere else.
Questions and Answers
Do you have other markets than Canada, USA and China??
We sell around the word.
I have heard that there is another pest which may attack Douglas Fir. Can you comment??
I don’t know of such a thing.
Is the pine beetle as threat in Georgia??
No, they have a different species of Pine, not like our Lodge Pole Pine.
On the matter of the SLA, does our presence in Georgia give us extra clout??
In the past some SLA negotiations were done with BC acting alone. Is this a good route??
I do not think BC should “go it alone” – these things have to be done at the Federal level to work.
In the past, the big complaint of the US companies is that our stumpage fees were unfairly low. Should we let US mills buy our logs at the same price we pay – would that solve it??
Not good because those mills in the south will object to those in Washington and Oregon getting cheap logs to compete with them.
Do we have a shipping cost advantage for lumber going to China compared with shipping it from Georgia??
At the moment there are so many empty shipping containers that have to be shipped back to China that lots of southern lumber can be shipped in them as cheaply from there as from BC.
Will the TPP agreement affect the lumber market??
From our reading of it at this point in time, we think it will not be significant.
Is Russian a factor in you markets??
The ruble is very low due to the oil slump and it gives Russia a currency advantage. However we don’t think they have to ability to respond with much more supply of lumber to take advantage of that.
What portion of the US market do our Canadian companies have??
We have about 28% of the US lumber market. But that is still about four times what we sell to China at the moment.
Will Interfor keep on spending capital on expansion or will they improve the dividend??
The feedback we get from our shareholders is “carry on as you are doing”.
What about the bi-product – chips, sawdust etc down there??
It is better there than here – more goes into container stuff rather than newsprint which is suffering so much here due to the internet.
Do you do anything to make Interfor attractive as a takeover target??
Not really – we have no control over that sort of thing.
Do you like the proposed wood exterior on the new art gallery??
I am not wild about it. I have seen some very attractive uses of wood – this is not one of them.
Do you see any resolution to the problems arising from the Supreme Court aboriginal land decision??
No there seems no way that it can be cleared up until we solve some of the underlying problems with the bands.
Ian Harris thanked our speaker for his most interesting and informative talk.

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