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Key takeaways:
Canadian Prime Minister Mark Carney announced a substantial support package for the Canadian softwood lumber industry in August.
The package, totaling C$1.2 billion, includes C$700 million in loan guarantees paired with C$500 million in grants. It also contains other contributions dedicated to market diversification efforts and worker retraining programs.
This comes at a critical time for an industry faced with a host of challenges. Ongoing fiber constraints in British Columbia, weak global construction markets and, of course, hefty duties on shipments to the largest single market for Canadian lumber exports, the United States.
As has been recently reported, the Department of Commerce (DOC) raised those combined countervailing (CVD) and antidumping duties (ADD) from 14.4% to a whopping 35.2% as of early August.
Also looming in the background is the ongoing DOC Section 232 investigation into wood and timber products and their impact on national security, which will be revealed by November at latest. While it remains unclear what those rates will ultimately look like, the investigation represents a major wildcard that could wreak further havoc on the Canadian industry if there are additional penalties ultimately stacked on top of the existing duties.
For those who follow the lumber industry, the stakes for Canada are clear. Knowing this, the immediate question becomes how effective Prime Minister Carney’s new program will be in shoring up Canadian sawmills.
It cannot be overstated how dependent Canadian sawmills are on the US market. Last year, nearly 12 BBF, or about 59%, of Canadian softwood lumber shipments went to the US, and that share has largely oscillated between 50% and 60% for the last 10 years.
On a value basis, softwood lumber exports totaled C$7.6 billion. Despite commitments from the Canadian government to diversify to new products and geographies outside the US customers, the sobering reality is that offshore markets continue to look further challenged from both a demand and supply perspective.
Although there may be opportunities to boost consumption in the Canadian domestic market, the volume of Canadian lumber consumed in the US is nearly double what is currently absorbed in Canada. Even with a fresh C$500 million in funding to work with plus very ambitious (likely impossible?) housing targets from the Canadian government, a pivot away from the US market will be a long, painful process for Canadian sawmill operators.
Although we are skeptical how effective the C$500 million in “transition” funding will be, the C$700 million in loan guarantees, which are clearly designed as a short-term lifeline for companies to weather the storm, seem pretty meaningful to the Canadian industry at first glance.
To illustrate the potential magnitude of these loan guarantees, some quick back-of-the-napkin math can help conceptualize the impact of the 21-percentage-point increase in average combined duties.
If Canadian producers were to simply absorb the incremental duty rate increase, using today’s FOB price for most Canadian softwood lumber (about US$450-500 per million board feet (MBF) or about C$620-690 per MBF) and last year’s export volumes to the US translates to a “just pay it” cost of C$1.6-1.7 billion in additional duty payments for Canadian producers over the next 12 months.
Of course, Canadian mill operators are not in a financial position to simply absorb an additional 21-percentage-point increase in duties, so this is an extreme estimate of the true cost. Mills will curtail output rather than continue producing at heavy losses until prices adjust accordingly.
Additionally, there is usually some degree of passthrough (i.e., who absorbs the tariff or tax) from the buyer to the seller. Between these factors, US demand likely falling 2-3% in 2025 as the housing market continues to slow and Canadian mills losing market share in the process, the absolute impact of financial losses in dollar terms to the Canadian industry is probably lower than this back-of-the-napkin estimate.
A more nuanced approach to this exercise is to take our latest Fastmarkets North American Lumber Forecast and tease out the cumulative losses to the Canadian industry.
For instance, we can estimate the cumulative financial losses for the Canadian softwood lumber industry by taking our latest price forecast, subtracting out estimated variable costs of production in Canada over the next 12 months (both the price and cost outlook factor in the higher duty levels through the first half of 2026), factor in a rough assumptions on other fixed costs, and multiply those implied margins by our production forecast for the next four quarters, and we arrive at financial losses of about C$1.0 billion.
We acknowledge there are many assumptions that could shift the outlook, but cumulative financial loss estimates in the C$0.5-1.5-billion range seem entirely plausible over this time frame.
There’s obviously other financial costs incurred by mills if they are forced to curtail (higher unit costs, potential interest costs for lifeline lending, etc.), and if we expand the analysis into longer-term economic losses, namely the loss of market share, that could further expand the theoretical cost to the Canadian industry.
But from just a cursory assessment to address industry liquidity needs, the loan guarantee program from the Canadian national government seems scoped appropriately to assist operators in dealing with liquidity challenges from the higher duties.
In that sense, our initial assessment is that this part of the program could potentially be impactful fairly quickly, especially if the aid is more targeted to small and medium sized mill operators who are faced with more serious financing constraints.
However, these are not grants or other cash transfers from the government, and many companies will still opt to curtail or close assets anyway rather than take on debt and bet on better operating conditions further down the road, especially for assets already plagued by other structural or operational challenges.
Private markets will also be tapped as lifelines, particularly by larger sawmill operators who have more favorable credit terms and may also be leery that tapping such federal loans would come back to bite them in future CVD investigations.
It also raises a host of other questions or concerns if you are a Canadian operator. If the lethargic demand environment we are seeing continues beyond 12 months, what happens then? Will new funding be rolled out to backstop mill losses and support employment rolls until the pain recedes? And what if the Section 232 investigation yields additional duties for Canadian mills?
For other industrial commodities that have undergone Section 232 investigations (e.g., copper, steel, aluminum), duty rates have settled as high as 50%, which, it goes without saying, would be disastrous for the Canadian industry. The current loan guarantee program would likely be undersized to address that kind of financial stress, which is not out of the realm of possibility.
It’s worth noting that this is not the first time such a program was implemented: in 2017, the Canadian government announced the rollout of C$500 million in loan guarantees in response to the initial CVD and ADDs implemented by the DOC in response to the US industry claim filed in 2016.
This was a part of a broader C$870-million package along with separate grant programs to support workers in response to the duties following the expiration of the last softwood lumber agreement (SLA).
Interestingly, the loan guarantees from the 2017 program do not seem to have made a major difference in CVD assessments in the years that followed, presumably because uptake to those loan programs was minimal at the time. Ultimately, subsidies for logs and energy costs continue to account for the lion’s share of the CVD assessments levels in previous annual reviews.
On the other hand, the newly announced grants for product diversification — a clear transfer from the government to a specified industry — will likely play a role in CVD determinations down the road.
It is also interesting to consider how the US government and US Lumber Coalition will take this new set of measures from the Canadian government. There’s no question that the US Lumber Coalition is not pleased with this new round of Canadian industry support, which it made clear in a recent statement.
And while President Trump and his team seem to now be engaging the Canadian government in pursuit of a broader trade agreement in response to goodwill measures by the Canadian government to lower some retaliatory tariffs, it’s certainly possible the US administration could take exception to these defensive measures and respond punitively to Canadian softwood lumber specifically even if a broader trade deal is inked.
However, there remain a number of questions about the nature of both the announced programs, how they will be distributed and what the uptake will be from the Canadian industry.
There is the additional unknown of the impending Section 232 tariffs on lumber, timber and other derivative products. If these are implemented without exemptions for Canadian softwood, the industry north of the border will find itself in a great deal of pain, and these loan guarantees will be a drop in the bucket comparatively.
Because the loan program is designed to be a short-term measure with clear limitations to backstop the beleaguered Canadian industry at this pivotal moment, we think it probably signals some hope or desire from Canadian officials to push quickly toward new agreements on softwood lumber and all traded goods more broadly (i.e., the United States Mexico Canada Agreement) in the months ahead.
Basic trade economics tell us the proximity and size of the US market dictates a natural dependence of Canadian commodities on the US consumer that will be challenging to decouple. Providing certainty around this critical trade relationship is really the only path forward to minimize financial pain for the Canadian softwood lumber industry.
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