Monday, February 11, 2008

Canadian Mill Towns Pay For U.S. Housing

Canadian Mill Towns Pay For U.S. Housing Collapse, by Anthony Faiola -Washington Post Staff Writer Friday, February 1, 2008

MACKENZIE, B.C. -- For a time, the snow-dusted forests ringing this picturesque mill town might as well have been made of gold.

Eager U.S. construction companies scooped up Canadian lumber in record volume during the great American housing boom of the middle of the decade. As prices spiked, sawmills cashed in, spending millions to increase production. They upgraded factories and enticed laborers with salaries upward of $80,000 a year, adding third shifts to pump out wood for McMansions in Miami and instant subdivisions in Phoenix, 24 hours a day.

The lumber bubble brought to this sleepy town of 4,500 people about 600miles north of Vancouver a rush of wealth, still easily visible in the freshly minted Ski-Doo snowmobiles and $60,000 pickup trucks, now idle in driveways. "Everybody went out and bought new toys," said Mackenzie's no-nonsense mayor, Stephanie Killam. "Nobody thought it would ever end. They were wrong."

As the ripple effect of the U.S. subprime-mortgage collapse spreads around the world, the boom times for Mackenzie and dozens of other towns built on the legacy of the Canadian lumberjack have come crashing down as fast as you can say "timber." It underscores fears of a broader global fallout from the bursting of the U.S. housing bubble as tens of billions of dollars in losses hit economic interests as diverse as Swiss bankers and Mexican villagers.

In this era of interconnected economies, when globalization can take away as fast as it can give, the bite of the U.S. subprime-mortgage crisis is perhaps as visible in this Canadian town as in any U.S.community. With wood demand and prices plummeting along with U.S.housing starts, three of Mackenzie's five sawmills have shut down indefinitely, while the others have cut shifts -- propelling the town's unemployment rate from single digits to more than 70 percent since August.

That includes the loss of Mackenzie's largest employer, the two AbitibiBowater mills, which closed so abruptly Jan. 11 that thousands of felled tree logs remain piled up on its icing lot, awaiting processing by new multimillion-dollar saws that now sit dormant. Six of Mackenzie's eight logging camps, where tree cutters and haulers dined on early morning breakfasts of flapjacks before gathering wood in the sub-zero mountain air, have closed. Five of the seven town councilors or their spouses have lost their jobs. Laid-off locals cluster in Mackenzie's recreational center to tap the newly created job assistance center and debate over coffee whether to follow those who are abandoning town in search of work.

The squeeze is working its way through the town economy. The local Curves gym lost 75 percent of its clients and is about to close. The quaint homemade candle and gift shop across from the Evergreen Mall let three of its five workers go because of a 50 percent sales drop. Local banks are renegotiating with mill workers to restructure home loans and avoid foreclosures.

Similar events are playing out across the Canadian hinterlands, where at least 139 sawmills -- many of which depend on the U.S. market for most of their sales -- have been forced to close indefinitely or reduce shifts over the past 18 months, according to Canadian government statistics. Thousands of forestry workers are jobless, creating what analysts are calling the industry's worse shake out in modern history.

Prices and exports of Canadian lumber rose to an all-time high in 2004as U.S. housing starts shot above 2 million a month. With housing starts falling to a 17-year low of 1 million in December, however, wood exports to the United States have followed suit. Their value in Canadian dollars, which takes into account their appreciation against the U.S.dollar in recent years, fell 41.6 percent, to $10.5 billion, in January through November 2007, compared with $18 billion in the comparable period in 2004, according to Canadian government statistics.

"They were selling $250,000 houses [in the United States] to guys who worked at McDonald's, and guess what, they couldn't afford them," said Gerald Girard, 45, a laid-off Mackenzie lumber worker. "So now, who's paying the price for it? It's not just them, aye. I'll tell you who. It's us."

Girard, mustached and solid-bodied, moved to Mackenzie with his parents as an toddler when the town was founded in 1966. They were the tenth family to settle here. "This town was my life, it's all I know, but I can't stay now and neither can many people," he said. "Within a year, I wouldn't be surprised if we're down to a third of our population in Mackenzie."

Fallout Is Global
Spooked markets from Frankfurt to Mumbai shed untold billions of dollarsin capitalization last month on fears of the so-called American contagion.

What experts are learning is that the huge gains from the U.S. housing bubble created unstable pockets of wealth worldwide, leaving more than Americans to get soaked when the bubble burst. Citibank and Merrill Lynch have been forced to take billions in write-downs from the U.S. subprime crisis, but so too have Swiss banking giant UBS and Germany's IKB Deutsche Industrie bank.

Some observers are even more concerned by the fallout on individual investors and communities overseas whose fortunes have turned decidedly south. In Norway, eight towns have reported losing $125 million through bad U.S. subprime investments, threatening payrolls and services. In Mexico, where tens of thousands of undocumented workers poured across the U.S.border in search of lucrative construction jobs during the housing boom, villages are suffering from a sharp drop in remittances as those jobs have dried up. Remittance flows into Mexico have ebbed from a record high of $2.36 billion in May, 2006 to $1.79 billion in November of 2007, the most recent figure available, according to the Bank of Mexico.

"The global effect is diverse, wide and, in some countries, quite deep,"said Nicolas P. Retsinas, director of Harvard University's Joint Center for Housing Studies. "There is no question that it is working its way through the global economy. Whether it's the Central Bank of China or dentists in Scandinavia, they are feeling it."

'Different This Time'
Perhaps now here else outside the United States has the sting been felt as badly as in Canada. Economists are sharply cutting their 2008 growth forecasts for this vast country of 33.4 million, which is taking hits to a variety of industries, including auto manufacturing, as its largest trading partner, the United States, flirts with recession.

The drop is most visible in the lumber industry. In recent months, that has been particularly true in the mountainous interior of British Columbia, a region of sweeping vistas that locals proudly claim was settled by Canada's "hewers of wood and carriers of water." More than 100 communities in the area remain largely dependent on the forestry sector, accounting for more than 200,000 jobs, according to theVancouver-based Council of Forest Industries.

Canada's lumber trade, as with all commodity-driven industries, has traditionally gone through ups and downs. But officials and analysts call the scope of the current crisis unprecedented. "In the past, you might have had a saw mill reduce shifts or idle for a short period oftime," said Kevin Mason, managing director and forestry analyst with Equity Research Associates of Gibsons, B.C. "But it's different this time. You're seeing mills close up indefinitely with lots of uncertainty about when, if ever, they're going to open again."

It happens as a number of forces pummel the industry, including the sharp rise in the value of the Canadian dollar against the U.S. dollar and the fast spread of the pine beetle, which leaves only a few years for viable harvest once it infests a forest. But analysts and officials agree that no single event has caused more damage than the U.S. housing crisis.

To capitalize on the initial boom, the AbitibiBowater sawmills inMackenzie spent nearly $17 million on new machinery and upgrades, roughly doubling production capability since 2001. But with prices falling precipitously in recent months, it is now more expensive for the company to make a 2-by-4 than to sell one -- hence the decision to shutdown the mills.

"By the time the housing market started to go down in the United States, we were geared up for more, not less," said Jean Beaulieu, AbitibiBowater vice president of operations, walking through the company's cavernous and empty sawmill. Layers of ice had frosted over outdoor machinery a week after it shut down. "As you can see, that was not exactly the best-case scenario."

U.S. lumber producers have been hit hard too, and blame the Canadians inpart for the nose dive in prices. After years of disputes, the two countries signed a softwood-lumber trade agreement in September 2006, bringing into effect various tariffs and quotas. But Canadians scaled back production at a slower rate than their U.S. counterparts even as demand began to slump.
They were able to do that, the U.S. forestry industry has charged, because the Canadian government, and particularly its provincial governments, unfairly assist the lumber industry through subsidies and tax breaks that violate the softwood agreement. If the Canadians had scaled back production earlier, they argue, prices across North America may not have fallen as steeply.

Additionally, U.S. trade officials and forestry-industry executives remain very skeptical of a plan being floated in Ottawa to offer $1billion in emergency assistance to hard-hit communities such as Mackenzie, saying it could skew the marketplace and drive prices downeven further.

"They're running the forestry industry as a jobs program," said Zoltanvan Heyningen, spokesman for the U.S. forestry industry-backed Coalition for Fair Lumber Imports. "I'm not denying that forestry is suffering badly on both sides of the border . . . [but] if they had cut back sooner, both of us probably wouldn't be as bad off as we are now."

Forced to Leave Home
In a little white house on a Mackenzie side street, the hows and whys and who is to blame mean little to the Hrubys.

Gordon Hruby, 45, a stocky millwright, and his wife, Lillian Hruby, 41, worked at AbitibiBowater for the past six years, settling in Mackenzie"for what we thought would be the rest of our lives," Gordon Hruby said. But less than two weeks after the two lost their jobs, they and their three children had their Tupperware and board games stacked in boxes in the living room and their sport-utility vehicle and pickup truck loaded with crates and Dad's work tools as they prepared to move on.

With virtually no job opportunities left in Mackenzie, the Hrubys faced the same dilemma confronting hundreds of families in this town of moose crossings and general stores. Many of the laid-off residents have taken jobs in the booming oil sands of neighboring Alberta, where desperate energy companies are willing to fly in laborers for good-paying "four on, four off" work schedules -- meaning workers are separated from their families for a month at a time.

Another option is to leave town together. That is what the Hrubys chose to do after Gordon and Lillian both landed jobs in Alberta. "You tell me how many of those families with the man away are going to manage to stay together?" Lillian Hruby, a thin, straight-talking woman, asked rhetorically.

Together, the couple earned $150,000 a year with their mill jobs -- long among the most lucrative choices for the tradespeople of rural Canada. Along with bonuses earned in the years of soaring production during theU.S. housing boom, it was enough to splurge last year on a 17-foot fishingboat and a trailer.

Now, they are leaving both behind along with their soon-to-be locked-up home-- the market is too soft from the layoffs to put it up for sale. They said they plan to rent a smaller place in Alberta.

Mackenzie's mayor, Killam, insists that her town will bounce back, citing hopes for a new mining operation not too far away and plans to lure more tourists for snowmobiling and skiing. Once the U.S. housing market improves, AbitibiBowater officials said, the sawmills will reopen, bringing back as many as 400 jobs.

But many here remain skeptical that any of it will happen, or at least soon enough to benefit them.

"Look, I really don't want to blame anybody; most people here don't,"Gordon Hruby said. "We did pretty good for awhile here, and it's just hard to see it all go so fast. But you have to think of your family first. We never wanted to leave Mackenzie, but we have no choice."


Staff researcher Richard Drezen contributed to this report.

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