Thank you very much. It's a privilege to be here today. I do feel a little out of place because I don't have any political affiliation.
I look at North American stocks. The weighting of my U.S. stocks that I follow is eight times that of the Canadian. A good reason for that is that the Canadian sector has been shrinking, as we all know.
My job is to find companies that can earn their cost to capital; it's not a responsibility I take lightly. The business has to be viable. We are in a global economy or global environment, and what it says is that you've got to be low cost; if you're high cost, you go bankrupt, and that's what we've been watching.
For instance, in eastern Canada the wood costs are more than double what they are in the U.S. south. At the same time, the margins on pulp, for instance, while they are resilient, are over 40% higher, so it's only a matter of time before they continue to get squeezed out.
I figure the best thing I can do today is make a few recommendations on what would be required to change my view of the Canadian sector. Right now my recommendations are essentially to invest in Canadian companies that have U.S. assets or companies that are not in Canada at all when it comes to pulp and paper.
If you look at the U.S. coalition for a minute, and the lumber or timberland owners, or whatever you want to call them, GP dropped out as being too expensive, and of course IP want out; they've been citing costs. The fact that they, International Paper, sold their timberlands and are in the process of selling their lumber--and I think it's noteworthy that IP did not support the challenge to the constitutionality of NAFTA--to my mind, means the major funder, the funder that's reportedly been putting up over 50% of the moneys, may be leaving. The coalition is now looking for new members. Certainly Canada, with its $500 million donation, should request a seat.
The point is that when you're looking at investing, are you going to invest in an industry that is taking $500 million and giving it to its competition? You are going to look at the competition first, and the beneficiaries. It's just natural.
The other point is that while we look on this as eternal--meaning eternal litigation--the coalition may not be able to attract enough members to continue it. That's why, from a conceptual point of view, I do question it.
To go back to what's been happening, I wrote a report in April 2002 that said the U.S. timberland owners--because it is the timberland owners, not the lumber guys--don't want an agreement; they just want litigation. Certainly everybody else has seen that. We know that. They really were creative, because they had two duties--the anti-dumping and the countervailing--and basically the lumber industry was being charged with having wood costs too high and too low at the same time. But, you know, it worked.
Right now we're asking how we can get out of it. The U.S. is saying they are going to make their best effort over the next 18 months to tell you what a market-based system is, or what one is that works for you. I look at that and say that maybe I should wait 18 months if I'm going to recommend that anybody invest, because you do have this uncertainty. At the same time, for me, more critical than anything else is how you get out.
The other thing that disturbs me, as I mentioned, is that the timberland owners are the guys funding the lobbying. The tax rate on timber in the U.S. for the smaller producers is as low as 14%, and for the lumber producers it's in the low 30% range. Clearly, what you want to do is make as much money as possible off the logs and make as little off the lumber, meaning if you can force a higher lumber price or higher cost, then you can sell your logs for more. It's logical; it works.
When we talk about what I read in the document, of 60% of the lumber producers signing, I'm saying, hey, the guys who are funding account for 15% of lumber production, so I don't know whether they have to sign. That disturbs me as well.
So what do I expect to happen? Well, we have what appears to be the export charge, where B.C. is going to run flat out, and you have the volume restraint, which will be the rest of Canada. When I say B.C., I just mean the B.C. interior, which is about half of our production.
So it's the worst of all worlds. You can't be half pregnant. It's either that you have a quota or you don't. If you have one running flat out and the other part of the world doing, shall we say, volume restraint, it's not going to work. You're just going to have low prices; that's all it is.
The way I look at it is that, yes, Canfor and the companies with the pine beetle will run flat out. Canfor will shut down the lumber mills in the non-beetle region. Northern Ontario and Quebec will get beaten up, especially in pulp.
You see, the insidious thing about all of this is that when you knock out the lumber mills, you reduce the chip supply. When you reduce the chip supply, the wood cost goes up. When the wood cost goes up, down go the newsprint mills and bankrupt go the pulp mills. So the way I look at it right now is that something has to give on the wood costs. Canada has to have the flexibility to be able to lower the wood costs, because as you just think about it, if you knock out the lumber mills and the wood costs keep going up, then that's it: northern Ontario, and certainly the pulp mills in the region, won't be around.
To summarize where I am, then, it is that looking at the agreement doesn't make me feel very good about recommending stocks to investors, so basically I'm going to have to wait for another day.
Thank you.