The cost increases related to these non-Code-related cost driver categories are:
Figure IV-10. Increase in provincial delivered wood costs of $8.40/m3 by non-Code-related cost driver type
The descriptive text contained below represents KPMG's synthesis of the significant regional issues raised during the site visits for each major cost driver.
a) Price and rate increases ($4.72/m3)
Price and rate increases (which include increases in labour costs, power and fuel prices, equipment costs and the costs of supplies) have resulted in an 11.5% increase in logging costs before stumpage and royalties. Note: this driver does not include logging contractor rate increases to cover additional labour, equipment, supplies, etc. required to address changes in operating conditions resulting from regulations, etc.
On a provincial basis, price and rate increases account for a total of $4.72/m3 in logging costs for the 1992 to 1996 period, which is equal to approximately 23% of the total increase of $20.62. Regionally, price and rate increases account for a greater proportion of the cost increase in the Southern Interior (29%) than in either the Northern Interior (19%) or the Coast (22%).
This cost driver had a major impact in all regions. These increases varied across cost categories depending on the relative reliance on labour and equipment within a particular category. Thus, the cost increase attributable to price and rate increases was greatest for the tree to truck category, with road expenses, dump, sort boom and rehaul, hauling and other overhead also showing significant increases.
b) Items under government control ($1.99/m3)
On a provincial basis, non-Code-related items under government control (other than stumpage and royalties) account for cost increases totaling $1.99/m3 between 1992 and 1996, which is equal to approximately 10% of the total increase of $20.62/m3. Regionally, items under government control increased costs on the Coast by 12% which is proportionately slightly greater than both the Southern Interior (9%) and the Northern Interior (6%). The major cost drivers related to the items under government control are described below.
i) Land use issues ($0.35/m3)
a. RLP:Regional level planning (LRMPs, CORE) ($0.14/m3)
Regional level planning was found to be a major cost driver (greater than $0.25/m3) in the Coastal region of the study. Regional level planning initiatives such as Land and Resource Management Plans (LRMPs) and the Commission on Resources and Environment (CORE) have put upwards pressure on logging costs through a number of means, examples of which include:
- Exclusion of timber harvesting in some areas.
- Increased rate of cut restrictions (reductions) in various watersheds.
- Restrictions on cutblock size.
- Management zone forest cover requirements.
- Requirements for non-clearcut silvicultural systems.
- Increased planning costs due to the added complexity of planning systems for these areas.
- Log around requirements during the planning process.
- Delays in approvals, particularly where the forest management requirements for various zones (e.g., enhanced forestry, low intensity zones) are poorly defined and still evolving.
Cost categories which have been significantly impacted by regional level planning include:
- Tree to truck:cost increases were primarily related to cutblock size restrictions included in regional level plans and requirements for incorporating a proportion of non-clearcut silvicultural systems into certain operations.
- Dump, sort, boom and rehaul:cost increases were the result of regional level planning rate of cut restrictions which caused some companies to disperse their operations and operate multiple dry land sorts.
- Forest regeneration:cost increases related to regional level planning were the result of making the required changes in silvicultural treatments (e.g., changes in silviculture systems to address LRMP requirements for a proportion of non-clearcut methods increased costs in one area).
- Forest management and engineering:cost increases were linked to increased staff time required to participate in regional level planning processes and an increase in operational planning requirements and complexity for low impact areas.
b. PAS:Area designations that exclude timber harvesting ($0.11/m3)
The Protected Area Strategy (PAS) was found to be a major cost driver only in the Southern Interior region of the study. This cost driver has increased logging costs in some areas as a result of:
- Loss of developed timber, (i.e., already roaded) in subsequently designated protected areas and a corresponding increase in development costs required to move operations and develop alternate areas.
- Interest Area log around requirements, which require operators to shift operations into other areas, resulting in greater concentration of road construction and harvesting operations. This cost driver may contribute to the impact of green-up and adjacency requirements as operations are confined to smaller areas and the relative impact of green-up requirements increases.
Cost categories which have been significantly impacted by the Protected Areas Strategy include:
- Tree to truck:cost increases were primarily the result of operators having to move into poorer quality timber in response to protected area designations and the establishment of PAS Interest Areas.
- Hauling:costs increased as a result of increased haul distance resulting from required shifts in operations. Increases in road costs came as a result of additional road construction required to access new areas.
- Forest management and engineering:cost increases were related to additional planning and layout requirements to replace roads and cutblocks tied up in Interest Areas or lost through PAS designation.
ii) Non-Code regulation ($1.11/m3)
a. WM:Changes in waste management requirements and other environmental regulations ($0.64/m3)
This cost driver was found to be major only for the Coastal region. Cost categories which have been significantly impacted by changes in the waste management requirements and other environmental regulation include:
- Dump, sort, boom and rehaul:the most significant operational change related to this cost driver has been the requirement to restrict or eliminate the open burning of debris on Coastal dryland sort yards. This restriction has led to a variety of expensive debris disposal methods being undertaken or researched including "hogging" debris, transporting debris to a remote disposal or burning site, building an approved "smokeless" incinerator or researching the feasibility of constructing and operating a "co-generation" plant.
- Tree to truck and road expense:cost increases have generally been related to increased handling of non-organic waste material generated in logging and hauling phases (oil, used wire rope, tires, batteries, etc.), training related to spill plans and the purchase and maintenance of spill containment and clean-up supplies.
b. PC:Impact of pre-Code guidelines ($0.25/m3)
This cost driver was found to have a major impact in the Coastal and Southern Interior regions. Cost categories which have been significantly impacted by pre-Code guidelines include:
- Tree to truck:cost increases were related to pre-Code guidelines such as the Okanagan Timber Harvesting Guidelines, the Coastal Fisheries Forestry Guidelines and the Coastal Logging Guidelines.
- Road expenses:cost increases were related to pre-Code guidelines such as the provincial Logging Road and Trail Specifications, the Kamloops Region Road Standards and the Coastal Fisheries Forestry Guidelines.
- Forest management and engineering:cost increases were related to increased planning and supervision to address pre-Code guidelines such as the Okanagan Timber Harvesting Guidelines, the Coastal Fisheries Forestry Guidelines, the Coastal Logging Guidelines, the provincial Logging Road and Trail Specifications and the Kamloops Regional Road Standards.
iii) Tenure administration ($0.53/m3)
a. TSR:Timber Supply Review and AAC determinations ($0.37/m3)
This cost driver was found to have a major impact in the Coastal region. Cost categories which have been significantly impacted by Timber Supply Review and AAC determinations include:
- Tree to truck:cost increases were related to timber supply areas or tree farm licenses where the AAC was partitioned in the last AAC determination. When the AAC is partitioned it is done to create a separate unit for cut control purposes from part of the forest profile to ensure that areas such as deciduous or marginal stands are harvested in proportion to their contribution to the AAC for the whole forest area. This has driven costs up because these deciduous or marginal areas are generally more difficult and costly to harvest.
- Other overhead:cost increases have resulted from fixed overhead costs for things such as divisional offices, camps, etc. being allocated over a significantly reduced annual harvest in a number of Vancouver Region Timber Supply Areas.
b. CA:Chart area and planning cell allocations ($0.13/m3)
Changes to Forest Licence chart area and planning cell allocations occur periodically to address local timber availability issues, pest infestations and other planning issues. As a result, licensees may be required to shift their operations into the new chart areas or planning cells.
This cost driver was found to have a major impact only in the Southern Interior region. Cost categories which have been significantly impacted by chart area and planning cell allocations include tree to truck, hauling, forest regeneration, road expenses and forest management and engineering.
Participants indicated that costs for all these categories have increased because the new planning cells allocated have generally been further away from the mills to which the wood is delivered than was the case in the past. This has meant significantly more work engineering new operating areas, building, maintaining and deactivating roads and longer, more costly hauling. It has also caused harvesting and silviculture operations to become more spread out and therefore costly to perform.
c) Items under company control ($1.40/m3)
On a provincial basis, items under company control account for a total of $1.40/m3 (7%) in logging costs for the 1992 to 1996 period. Regionally, items under company control accounted for a much greater proportion of the cost increase in the Northern Interior (17%) than both the Southern Interior (7%) and the Coast (2%). Cost increases were found to be related to items such as: company decisions to change to cut-to-length logging systems, and changes in harvesting systems to better address harvesting of the full forest profile in order to maintain or enhance AAC. The major cost drivers related to items under company control are described below.
i) UTIL:Changes in wood utilization levels ($0.14/m3)
Under some circumstances (e.g., local shortages of pulp logs), companies have chosen to increase their utilization of smaller, lower grade logs as a means to meet that demand. These changes in utilization levels have resulted in cost increases as companies harvest smaller trees and logs with considerable defect (in excess of the regulated close utilization standards).
This cost driver was found to have a major impact only in the Coastal region. Tree to truck, dump, sort, boom and rehaul costs have been significantly increased by increases in wood utilization levels on the Coast. While Interior companies significantly increased their utilization levels in 1994 and 1995, Interior utilization levels dropped in response to market conditions in 1996, with the result that this study (which only looked at 1992 and 1996 costs in relation to cost drivers) did not identify utilization levels as a significant driver in the Interior.
ii) STU:Impact of stumpage, royalty and rent increases ($0.26/m3)
This cost driver refers only to licensee actions in response to stumpage, royalty and rent increases and not the increases themselves. For example, where stumpage rates have risen significantly, licensees may devote more staff time to reviewing stumpage rate determinations for accuracy, or may choose to incur moving costs as they shift operations between cutting permits with different stumpage rates in order to minimize the overall impact of stumpage rate increases on their operations.
This cost driver was found to have a major impact only in the Coastal region. Costs have significantly increased in the Other Overhead category because some operators have decided not to log some extremely high stumpage cutting permits. This reduced their overall harvest level in 1996, which induced an increase in Other Overhead costs per cubic metre because fixed overhead costs must then be written off over a smaller harvest volume.
iii) BD:Business decisions (net impact of $0.02/m3)
This cost driver was found to have a major impact on costs in the Coastal and Northern Interior regions. On the Coast, business decisions accounted for cost reductions totaling $1.05/m3 (-3%), while in the Northern Interior they accounted for cost increases of $1.04/m3 (+7%).
This cost driver is defined as choices made which drive costs for a particular cost category either up or down in order to optimize some aspect of the business. It does not include the amortized costs associated with the purchase of forest tenures. Sometimes the impact of this cost driver is to drive up the costs of one phase of operation in order to gain efficiencies in another part of the woodlands or milling operation. Some examples of business decisions include:
- Replacing logging camps with commuter services to reduce long-term costs and thereby increasing short term Other Overhead costs.
- Increasing the number of Coastal log sort categories to add value to logs and thereby increasing Dump, sort, boom and rehaul costs.
- Changing to cut-to-length harvesting systems to reduce, or eliminate mill merchandising costs and thereby increasing Tree to truck costs.
- Making a commitment to fully utilize the forest profile to increase AAC on area-based tenures and thereby increasing all delivered wood cost categories.
iv) HL:Impact of historical level of harvesting ($0.98/m3)
This cost driver was found to have a major impact in all regions of the province. It has impacted many cost categories, however, the most significant ones include:
- Tree to truck:the tendency to harvest the best, most accessible timber first has meant that as operations move into less accessible and valuable stands, they have to work harder to harvest the same volume of timber. This has increased costs.
- Hauling:movement to less accessible, more remote timber has increased hauling distances, cycle times and therefore, costs.
- Dump, sort, boom and rehaul:movement to less accessible, more remote timber has increased the need for intermediate rail or water transport of logs. This is particularly so for the Coast and some parts of the Northern Interior where the new areas of operation are often in a remote inlet or valley not connected by road to the main operational road system.
- Forest regeneration:for some parts of the Northern Interior historical logging patterns have forced operations into new areas which have higher silviculture costs per cubic metre of wood harvested. This can occur for a variety of silvicultural reasons related to the requirements to meet the free-growing standards or simply because the new areas have smaller commercial volumes per hectare and therefore cost more to reforest for a given harvest volume.
- Road expenses:road construction, maintenance and deactivation costs have simply been driven higher because the movement to more remote timber stands has increased the amount of road required by an operation and these new roads are often found in more difficult terrain.
2. Code-related cost drivers ($12.22/m3)
Code-related cost drivers accounted for a total increase of $12.22/m3 (59%) in logging costs for the 1992 to 1996 period. Regionally, Code-related cost increases account for a greater proportion of the cost increase on the Coast (64%) than in the Interior (53% in the Southern Interior and 55% in the Northern Interior). The range of Code-related cost driver impacts varied from 48% to 82% on the Coast and 35% to 64% in the Interior.
The Code-related cost drivers have been grouped within the following categories:
