Following the many challenges driven by the onset of the coronavirus outbreak in 2020, Canfor Pulp experienced improved results in 2021, primarily reflecting the strengthening of global pulp market fundamentals in the first half of the year which more than offset the impacts from extreme weather conditions in British Columbia (“BC”) on supply chain and operations, production downtime and global pulp market weakness in the latter part of the year.
At the end of the 2021 year, recognizing increasing challenges to the business posed by fiber availability and costs, the company recorded an asset impairment of $95.0 million. Before taking account of adjusting items, the company’s operating income was $31.9 million for the current year, with adjusted net income of $0.38 per share, an improvement of $96.5 million from the adjusted operating loss of $64.6 million for the prior year, and adjusted net loss of $0.34 per share. Canfor Pulp reported an operating loss for 2021 of $65.5 million, versus an operating loss of $56.1 million for 2020.
For the fourth quarter of 2021, the company reported an operating loss of $137.2 million. After taking account of adjusting items, largely comprised of an asset impairment, the company’s operating loss for the fourth quarter of 2021 was $41.1 million compared to an adjusted operating income of $19.3 million for the previous quarter.
The loss in the current period reflected weaker global pulp market conditions, combined with the significant impact of severe weather conditions on the Company’s operations and shipments in the current quarter, most notably at its Northwood Northern Bleached Softwood Kraft (“NBSK”) pulp mill (“Northwood”) and its Taylor Bleached Chemi-Thermo Mechanical Pulp (“BCTMP”) mill (“Taylor”), as well as capital-related downtime at Northwood relating to Canfor Pulp’s decision to rebuild the lower furnace of recovery boiler number one (“RB1”).
Commenting on the company’s 2021 and fourth quarter of 2021 results, CPPI’s Chief Executive Officer, Don Kayne said, “This was a difficult quarter to end what was an improved year for Canfor Pulp. Our pulp business faced many uncontrollable challenges in the second half of the year, including intense weather conditions in BC and global supply chain disruptions. We once again want to thank our employees for their hard work, resilience, and commitment to safety.”
For the fourth quarter of 2021, the weaker pulp market conditions experienced towards the end of the previous quarter continued into the current period and, as a result, global softwood pulp producer inventory levels remained well above the balanced range (43 days of supply in December 2021, a decrease of two days from September 2021).
Pulp production was 190,000 tonnes for the fourth quarter of 2021, down 57,000 tonnes, or 23%, from the previous quarter, primarily reflecting the quarter-over-quarter impact of downtime. The current quarter was particularly challenging as unprecedented flooding and harsh winter conditions in BC significantly impacted the operational performance at all the Company’s pulp mills and resulted in material transportation-related downtime at Northwood and Taylor.
Production at Northwood was also impacted by the extended outage on one production line at Northwood from early December to enable the replacement of the lower furnace on RB1. Combined, these factors reduced current quarter NBSK pulp production by approximately 100,000 tonnes and BCTMP production by 20,000 tonnes.
In the third quarter of 2021, decreased operating days largely reflected scheduled maintenance outages at the company’s Prince George NBSK pulp mill (“PG”) and Taylor, as well as incremental downtime at Northwood and Taylor reflecting both weather-related rail disruptions and, in the case of Northwood, digester-related operational upsets in July (combined, reducing pulp production by approximately 42,000 tonnes). In addition, the previous quarter’s pulp production reflected various smaller operational upsets through the quarter (approximately 15,000 tonnes).
The company’s pulp shipments totaled 216,000 tonnes, down 25,000 tonnes, or 10%, from the previous quarter, principally due to the impact of weather-related transportation disruptions in BC and the associated decrease in production volumes, combined with the ongoing effects of a constrained global logistics network, offset in part by a drawdown of inventory in the current quarter during the Northwood RB1 downtime.
Pulp unit manufacturing costs were significantly higher than the prior quarter principally reflecting reduced production in the current period, offset in part by decreased energy usage and lower maintenance spend.
Looking forward there remains significant uncertainty with regards to the future of economically viable fiber within BC. This uncertainty is driven by, among other factors, the lasting impacts of the Mountain Pine Beetle epidemic, wildfire events, future Timber Supply Review determinations by the BC Government, as well as uncertainties associated with unsettled land and title claims by various Indigenous Nations and outstanding policy, land use decisions and legislative initiatives by the BC Government. This includes the BC Government’s announced deferral of harvesting on 2.6 million hectares of BC’s old-growth forests and the potential redistribution of Crown tenure harvesting rights, including Indigenous Nations.
Consequently, the BC sawmill manufacturing industry faces a constrained fiber supply environment, where existing sawmill capacity outstrips the available timber supply in BC. Until this imbalance is corrected, Canfor Pulp anticipates that escalating log cost pressures in BC will translate into a higher cost fiber supply for its pulp mills (both for sawmill residual chips and whole-log chips). In addition, it is expected that the long-term aggregate available chip supply will be permanently reduced.
Recognizing these increased fiber costs as well as ongoing uncertainty surrounding fiber availability, the company performed an impairment test for its pulp segment as of December 31, 2021, which resulted in an impairment charge of $95.0 million being recognized in the current year as a reduction to the carrying value of pulp segment assets.
Despite the recent uplift in global pulp markets, the limited and intermittent rail service in BC experienced in recent weeks has put further pressure on an already constrained global logistics network. Consequently, as previously announced, the company’s results in the first quarter of 2022 will reflect a minimum six-week curtailment at Taylor, with a projected 25,000 tonnes of reduced BCTMP production.
The company also anticipates that the transportation disruptions will result in lower projected NBSK pulp and paper shipment volumes in the first quarter of 2022. Canfor Pulp will continue to monitor and adapt to the unfolding logistic situation over the coming weeks. In addition, global inflationary cost increases, particularly for chemicals, are projected to weigh on the company’s results in the first quarter of 2022.
Furthermore, the Canfor Pulp’s results in the first quarter of 2022 will reflect the impact of the RB1 capital-related outage at Northwood into late-March, including reduced pulp production (approximately 70,000 tonnes) and shipments, as well as higher pulp unit manufacturing costs. As the RB1 rebuild approaches completion a key focus of the company’s kraft pulp mills in 2022 will be on improving operational reliability and closely managing manufacturing and fiber costs.
No major maintenance outages are planned for the first quarter of 2022. In the second quarter of 2022, a maintenance outage is currently planned at Northwood and Taylor, with a projected 25,000 tonnes of reduced NBSK pulp production and an estimated 5,000 tonnes of reduced BCTMP production, respectively. In addition, a maintenance outage is scheduled at the Intercontinental NBSK pulp mill in the third quarter of 2022 with a projected 10,000 tonnes of reduced NBSK pulp production.