Industry Report: Forest products

November 18, 2009 — The Canadian Business Journal

Strong loonie. Competition from low-cost regions. High fuel and energy prices. New provincial policies. Decreasing market demand. High cost of operations. Inadequate supplies.

At the risk of sounding dramatic, it seems like everything is working against the Canadian forest products industry. According to Avrim Lazar, president and CEO of the Forest Products Association of Canada (FPAC), what seems dramatic is simply true. “We are close to the bottom of what has been the worst cycle in two generations,” he confirms. “There are signs of recovery, but there has not been any substance of recovery yet. We are bumping along the bottom.”

There are a number of factors that have contributed to the slow decline of the forestry products industry over the years. One of the most significant issues is new media and how people are accessing their information—it’s no secret the internet has been hard on the newsprint industry. Another key factor has been the international shift in production. As manufacturing moves offshore to low-cost countries, such as China and India, the demand for packaging has gone with it.

Of course, the recession isn’t helping and neither is the loonie. “All of our input costs are in Canadian dollars and all sales are in American dollars,” Lazar explains, “so the surge in the loonie has sucked the wind out of the recovery.”

This is just dollars and cents. To get the full picture of how the declining industry is really affecting Canadians, one only has to look to one of hundreds of forestry-based communities across the country.

Not just any sector

According to figures from Natural Resources Canada, more than 44,050 pulp and paper mill layoffs were announced in more than 200 communities across Canada between January 2003 and April 2009. These layoffs are linked to indefinite or permanent forest product mill closures and production curtailments. To put that loss in perspective, consider this number does not include several temporary layoffs, or the layoffs in sub-industries, such as logging and forestry operations. Also note that each job in the forest industry supports about two indirect jobs.

This ripple effect has the biggest consequence for remote communities whose livelihood is based entirely around the local mill. FPAC estimates more than 650 Canadian communities rely on forestry—half of which depend on forestry for at least 50 per cent of household income. Of those 650 towns, approximately 160 communities are solely reliant on forestry.

“Profoundly painful,” says Lazar of the devastation in these communities. “Some mills that closed will never re-open—even for those that will come back, the closure period is very difficult. In these towns, the forest industry is the driver of all economic activity, including taxi cabs, gas stations and restaurants.”

Forestry isn’t just another industrial sector. It is a major employer in both urban and rural Canada. In fact, Canada’s forests, sawmills and pulp and paper facilities directly employ close to 274,000 Canadians. If you factor in employment from related industries—such as construction, chemicals, engineering and transportation—the industry supports over 694,000 direct and indirect jobs.

Federal intervention

The forest products industry is nation-wide, with a presence in 12 out of 13 provinces and territories. It’s no surprise, then, that the federal government gets involved when it’s in trouble. In June 2009, the Canadian government stepped in and announced a $1-billion Green Transformation package to help pulp and paper mills over a three-year period. The package includes grants that can be accessed by the mills to reduce dependence on traditional energy resources.

This isn’t the first time the government (federal or provincial) has had to bail out the industry. In 2005, Québec spent $450 million over three years to ease the industry’s pain. In September 2007, Ontario promised $330 million over five years.

Will this $1-billion package be what it takes to pull forest products out of the black hole? Probably not. But it is a good start.

“That money is helping a lot,” says Lazar. “One thing our federal government has done, and you have to respect them for this, is they said the money could only be used for upgrading the environmental performance of Canadian mills. Those upgrades lead to energy efficiency, higher performance and the modernization of our mills, allowing us to be more competitive on a global scale. We might not see the same amount of mills as we have in the past, but the ones that are operating will be world-class and sustainable.”

Lazar stops short of full-on praise for the government, saying that “while we did get this one-time grant from the government, what we haven’t had is the necessary policy framework or sustained funding for the transformation. These policies need to recognize the global environment in which the industry operates, as well as the domestic requirements for a healthy and vigorous industry.”

In addition to more intervention from the government, Lazar recognises the other solution is within the industry itself. “For us, the key is improving production, diversifying our product and integrating new bio energy into the industry,” he continues. “There is huge global demand for bio-products and we need to make sure our products have the highest environmental credentials. We are well on our way, compared to our competitors, but we cannot rest on our laurels. We are always improving, but the world keeps raising the bar.”

Finally, some good news

What hasn’t killed the forest product industry has certainly made it stronger. Finding ways to be efficient and productive, for example, is now second nature to major Canadian forestry players. “Everyone who is still alive after the last three years has gone to efficiency school,” Lazar laughs. “There is no better way to learn to be efficient than trying stay afloat. We are lean, inventive and ready to compete.”

Although the markets haven’t quite come back and the dollar is undermining the gains the industry has made, when things turn around, Canadian forestry will be ready.

Lazar recognises that demand for some products may never return to previous levels. Paper is one of those products. “The paper business will continue in certain niches, where it makes the economics of pulp and lumber more viable, but it will have shrunk,” he says.

Having said that, Lazar is confident that pulp demand will come back, as will lumber. “Our industry is highly correlated with population growth,” he adds, “especially in the U.S. Their population is still growing. Hard times have meant people are moving back with family, but as soon as they get a cheque, they will move and use wood in their houses.” If Lazar is correct, the next five years should see a strong recovery for forest products.

The future is green

While traditional forest commodities will continue to make significant contributions to Canada’s economy, the industry is diversifying to accommodate for the shifts in global demands. Right now, major investments into R&D are promising to improve forest products’ long-term profitability.

Specifically, the surge in renewable bio-products and bio-energy has presented several opportunities to transform the sector. Items such as renewable fuels, fertilizers and bio-plastics represent a line-up of value adds that have potential to help the economy and the environment. Most importantly, promoting innovation in this arena secures a competitive advantage for Canada.

“There is a huge potential for bio-products in the industry,” Lazar states. “Our research shows Canada has huge potential that will be realised when we integrate these new products into the existing forestry industry infrastructure. It will create a diversified economic base where the results are robust and the social and environmental impact is positive.”

“As pressure mounts for products with verifiably superior environmental credentials, Canada will have a global advantage,” Lazar concludes. “We are ahead of the curve.”

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