What I Learned on My Trip to a Canadian Sawmill

The first thing I noticed about Walt James was his yellow eyeballs...

I was driving up the coast of British Columbia in my rental car, looking at sawmills, when I came across a small cedar operation called Sechelt Lumber and Milling in the town of Sechelt. I had read on the Internet about a large bankruptcy in the area, and decided I'd better travel to Sechelt to get the full story.

I pulled onto the property. The mill was operating. I could hear the screech of the saw blade and see a flow of sawdust shooting out of a pipe onto a golden mound behind the mill. A large logging tractor carried six trees in its pincers. I just managed to dodge it.

As I pressed my nose against the office window, I heard, "waddya want?" from behind me. I looked around and found one of the most grizzly looking old men I'd ever seen. He was dressed like a lumberjack. Suspenders held up his jeans, his boots had enormous steel toecaps in them, and his baseball cap looked like the logging tractor had run over it more than once.

But it was his eyeballs that really phased me. The whites around his eyes were turning a zombie yellow. He was very suspicious of me. He probably thought I was from an environmental group. I asked him if there was someone I could talk to. "I'm the owner," he said. His name was Walt James.

At first, I had trouble getting James to talk. But after a couple of minutes of idle chatter about the lumber industry, he opened up...

It turns out Sechelt Lumber and Milling is on the verge of bankruptcy. James was angry about this. He felt that his customers had betrayed him. Sechelt Lumber has served its local community for decades and built strong relationships. Earlier this year, these loyal customers suddenly stopped buying Sechelt's wood and started doing business with American suppliers instead.

It's cheaper for a building contractor in Sechelt to buy his lumber in America and have it shipped north than it is for him to buy from the local Canadian sawmill.

The exchange rate is the reason. Between December 31, 2002, and December 31, 2006, the Canadian dollar rose from 62 cents to 85 cents. This year, the rise accelerated. It's now at $1.02. That's a 65% gain in less than five years.

This change in the currency market makes Canadian lumber 65% more expensive to American customers and reduces the cost of American lumber by 40% for Canadian customers.

Tariffs are another reason Sechelt Lumber lost its competitive edge. The U.S. adds a 15% import duty on lumber shipments from Canada. This protects U.S. producers from Canadian competition. Canada has no tariff on American lumber shipments.

Finally, production costs are higher in Canada. Sechelt pays for rent, utilities, wages, and raw materials in expensive Canadian dollars. American producers pay costs in cheap U.S. dollars.

Spittle flew from the old man's mouth as he explained all this to me. He walked away from me several times in disgust, only to come back with another point.

"I have four generations in this business," he concluded, pounding the ground with his steel toecap. "And I got my four sons working here at the mill. And I want my grandchildren to work here, too. But why have they got to make life so hard for me?"

I liked the old man and felt sorry for him. The reality is, he's not alone. With the Canadian dollar at such elevated levels, the entire Canadian lumber industry has lost its competitive edge in North America.

There's an opportunity for investors here, too. This is great news for the U.S. lumber industry... especially those people who own sawmills near the Canadian border. They won't have any Canadian competition for a while, and they'll be able to steal all the Canadians' old customers... as the old man from Sechelt discovered recently.

Good investing,

Tom