In response to punishing U.S. softwood duties and slumping lumber prices, Canfor Corp. announced it will close two sawmills in British Columbia, moving the lost production to other mills. "We have had to rethink everything we are doing to find ways to get our costs down and improve profitability," said David Emerson, the chief executive. The continuing impact of the 27% tariff "reinforces the need to carry on with the program which we are on, which is to get our costs down," Mr. Emerson said. Though the company, one of Canada's leading sawmillers, has no immediate plans for more closures, he added, "we will continue to look at our operations in terms of maximizing efficiencies."

Of its 13 mills, Canfor said its Upper Fraser and Taylor operations - the two it plans to close - have the highest operating costs. Meanwhile, the company said it will spend $40-million on upgrades to two other mills in the same region of the province, allowing those operations to move from two shifts a day to three shifts and increase capacity. The closures and upgrades - they are scheduled for September - are not expected to affect production capacity. But the company said they will shave about $30-million a year from its costs. About 220 jobs will be affected. Since May most Canadian producers have been paying a 27% U.S. duty on softwood, imposed after a powerful U.S. industry group complained that Canadian companies unfairly benefit from government subsidies. Most industry observers deny this is the case, maintaining instead that the tariff is an attempt by U.S. lumber mills to force Canadian mills out of the market as a way to increase prices. But in a move that has shocked industry observers, Canfor and many of its largest rivals on this side of the border responded by ramping up production and reducing costs as a way to beat the duties. As a result more Canadian softwood than ever is flowing into the United States and lumber prices are continuing to fall.

"I think it came as a big surprise to Americans, also to people in Canada," Mr. Emerson said. "I don't think anyone anticipated it." Producers in the B.C. interior are pursuing that strategy most aggressively, said Kevin Mason, an analyst at Equity Research Associates. "Canfor, Slocan and West Fraser have all done that. Everyone's striving to get their costs down without affecting capacity.... They have ramped up production quite massively. In the interior it has just gone through the roof." Ironically, the impact of the duties has been hardest in the United States, with dozens of inefficient independent operators forced to close their doors. "There is a lot of anger and frustration south of the border," Mr. Emerson said. And analysts said the duties have had another unintended consequence. They have turned Canadian producers into behemoths. "Once you have started down this path and ramped up production, does it ever get turned off?" Mr. Mason said. "If it's efficient and low cost, it's going to be there." In other words, long after the trade dispute is settled, British Columbia's efficient producers will still be churning huge amounts of cheap lumber, with little reason let up on the throttle. "It will be interesting to see how this plays out in the negotiations," he said.

Officials from Canada and the United States are set to meet again in Washington on Jan. 29 to discuss the recent U.S. proposal. So far only British Columbia has said it likes the proposal, presented by Grant Aldonas, a senior official at the U.S. Commerce Department. Yesterday Mr. Emerson called the proposal "a model which should be helpful in creating a long-term solution [to the trade dispute]."