By Mrinalika Roy and Seher Dareen

March 20 (Reuters) - U.S. President Donald Trump's

tariff threat could motivate more Canadian lumber producers to

shift to the U.S. southern border while accelerating efforts to

find new markets, industry experts said.

The levies are the latest in a nearly four-decade dispute

between the neighbors over softwood lumber, used in

construction, furniture and paper production.

Levies on Canadian lumber could hit 40% if current duties of

14.54%, and Trump's proposed 25% tariffs are added. Trump has

paused tariffs on goods compliant with the United

States-Mexico-Canada Agreement until April 2.

Washington has alleged that Canadian lumber products were

subsidized and sold in the U.S. below fair market value. Canada

has successfully challenged such duties under the dispute

resolution provisions of multilateral trade agreements.

Canada supplies about a quarter of U.S. lumber, and over the

past decade, several Canadian mills have moved their operations

to the U.S. South, drawn by cheaper, abundant timber and its

availability on private lands as opposed to Crown land, which

employs stringent harvesting policies.

"Disparity in log costs and availability are the major

drivers here, but Canadian investment in the region has

certainly been partially motivated to moving operations where

they avoid the impact of duties," said Dustin Jalbert, senior

economist, wood products, at commodity pricing agency

FastMarkets.

Canfor ( CFPZF ) , for instance, has been shuttering

operations in British Columbia, citing challenges accessing

economical fibre, losses, weak markets and U.S. tariffs.

About 70% of Canfor's ( CFPZF ) lumber business is now outside Canada,

while 80% of peer Weyerhaeuser's lumber manufacturing is

now in the U.S., they said in their latest quarterly earnings

calls.

Canfor ( CFPZF ), Weyerhaeuser and several Canadian companies declined

to comment for this story.

"In 2004, there were only two sawmills owned by a Canadian

manufacturer. Today, we have more than 50," said Kyle Little,

chief operating officer at New York-based Sherwood Lumber, which

supplies over 2,000 U.S. lumber yards and manufacturers.

"Canadian companies now produce more than a third of the

volume of the largest producing region in the U.S. - the U.S.

South."

The U.S. South surpassed Canada in softwood lumber capacity

in 2022 and will continue to expand this decade, FastMarkets

said.

British Columbia's dwindling output, which has halved since

2017, is dragging Canada's market share.

"For years, producers have opted to open mills in the U.S.

South due to challenges in Canada," and the tariffs could

expedite this, said Morningstar analyst Spencer Liberman.

ALTERNATE MARKETS

British Columbia could start redirecting supplies to Asia

Pacific to avoid tariffs, said BC Lumber Trade Council President

Kurt Niquidet.

However, this will be challenging as Canadian sawmills are

set up to mainly cater to the U.S. housing industry.

"Our alternatives around the globe are somewhat maximized

already," said Sean Steede, vice president, sales & marketing at

Vancouver-based building materials company Interex Forest

Products.

LUMBER PAIN

The disruptions mean pain for both companies and customers.

"Even under modest growth scenarios, it's probably closer to

a decade to replace Canadian supply completely (in the U.S),"

Jalbert said, flagging more short-term financial pain for the

industry facing multiple challenges.

Lumber futures scaled a two-and-a-half-year peak

above $650 per thousand board feet in March.

Prices could reach $765 within weeks or months after tariff

implementation, pushing the cost of a medium house to more than

$10,000, said Hispanic Construction Council CEO George Carrillo.

(Reporting by Mrinalika Roy, Seher Dareen in Bengaluru,

additional reporting by Vallari Srivastava; Editing by Arpan

Varghese and Sriraj Kalluvila)