Countervailing Duty Preliminary Ruling...19.88%...Bearish For Lumber

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Lumber Briefs
Issue #10214 - May 2017 | Page #65
By Matt Layman

Preliminary CVD announced at 19.88%

The pieces are falling into place. Department of Commerce has issued its preliminary countervailing duty on Canadian softwood lumber exports destined for the U.S. The rate of 19.88% is lower than the anticipated 30%. In addition, the four largest producers of Canadian lumber will be exempt from retroactive duties. On two occasions this year, Canadian producers have boosted prices to build in a premium for the anticipated duties. My estimate is that no less than 25% or $100 per thousand board feet of the current value of 2x4#2 SPF-W at $410 fob mill is duty premium. I see this CVD as bearish for the lumber market.

Definition

Countervailing duties (CVD) are meant to level the playing field between domestic producers of a product and foreign producers of the same product who can afford to sell it at a lower price because of the subsidy they receive from their government.

Critical Circumstances = 90-day Retroactivity

Early afternoon on Monday, April 24, DOC released its findings that the four largest Canadian lumber producers who had been required to provide U.S. export data had not exceeded a 15% increase, or surge that would have created the basis for “critical circumstances.” Critical circumstances are required to implement a 90-day retroactive duty. That was a huge win for the big four...West Fraser, Canfor, Tolko, and Resolute. That ruling means they are exempt from paying retroactive duty...saving them $millions.

JD Irving, a producer in eastern Canada, was found to have surged shipments and will be taxed retroactively. Only the top four producers, who make 40% of Canada’s softwood lumber, will be exempt from retroactive duties. All others, that produce the other 60%, will be fined...costing them multiple $millions.

These five companies’ total production and exports to the U.S. were subtracted from Canada’s total to determine that the remaining producers, and Irving, surged shipments. “All others” will be assessed retroactive duties.

Duty Calculations...Who Pays What?

Duties placed on the five companies investigated are listed below. The amount of subsidies the foreign producer receives from the government is the basis for the subsidy rate by which the subsidy is offset, or “countervailed,” through higher import duties.

West Fraser, 24.12%;
Canfor, 20.26%;
Tolko, 19.50%;
Resolute, 12.82%;
JD Irving, 3.02%.

The weighted average of those five companies’ rates determine the CVD rate for everyone else...19.88%.

It is important to note that the CVD’s for each company investigated was proportionate to their estimated subsidy from the Canadian government. The amount of Crown owned timber used versus privately owned timber has a bearing on the subsidy. In general, eastern Canadian provinces use less Crown timber. JD Irving, with substantial timber holdings, was penalized least.

Definition

An anti-dumping duty is a protectionist tariff that a domestic government imposes on foreign imports that it believes are priced below fair market value. Dumping is a process where a company exports a product at a price lower than the price it normally charges on its own home market.

The “SPLINTER

Next on the agenda is Canada’s legal attempt to nullify, reduce the CVD. At the same time, the Anti-Dumping case will be addressed. It is no secret that Canadian lumber mills sell to non-U.S. destinations at different prices when a duty is in place. Canadian lumber buyers plan for it and expect it.

The splinter will be proving that the price in its home market is “normally” lower. For example, if the list price is the same for every customer, plus all applicable duties, tariffs, taxes...and there are no penalties to add for shipping to Canada and China...there is no dumping. However, if mill sales prices to Canadian companies are normally lower than sales to the U.S.; there’s the rub. A simple examination of invoices will reveal that truth. [And for the record, I'll do the leg work for $200 per hour plus expenses and complete the job in six weeks or sooner. That is a firm offer.]

Looking Forward...ml

A veteran lumberman, Matt Layman publishes Layman's Lumber Guide, the weekly forecasts and buying advisories that help component manufacturers save money on lumber purchases every day. You can reach Matt at 336-516-6684 or matt@laymansguide.org.

Matt Layman

Author: Matt Layman

Matt Layman, Publisher, Layman’s Lumber Guide

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