RNNR Committee Report

Canada’s forest products industry is currently in the midst of one of the most difficult periods it has ever faced. As John Allan, president and CEO of the Council of Forest Industries, put it in his appearance before the Committee, “the industry is in a crisis of unprecedented proportion.”[2] More than ever, it appears that large-scale structural adjustments will be necessary if the industry is to adjust to, and eventually move beyond, the current downturn.

Natural Resources Canada reports that since 2003, over 300 plants (pulp mills, paper machines, sawmills, etc.) have closed, and approximately 33,000 mill jobs have been lost.[3] Job losses have accelerated through 2006 and 2007. The type of jobs lost varies from region to region and from province to province. Overall, since 2003, roughly one-third of the job losses in the forest industry occurred in Quebec.

Canadian Forest Industry Layoffs by Province
January 2003 to January 2008

Source: Natural Resources Canada.

Plant closures and job losses have also had a ripple effect throughout the economy. Businesses that supply products and services to forest products companies are also negatively impacted by the crisis.

These plant closures and job losses have had important socio-economic impacts; dozens of communities that are dependent on the forest industry for their survival face an uncertain future. The Committee received testimony from a number of forest community mayors and reeves that these closures and job losses are having a significant social and economic impact on their communities. Families are being dislocated, health and education services are eroding, and municipal infrastructure is not being renewed in many such communities.

Jim Scarrow, Mayor of the City of Prince Albert, Saskatchewan, told the Committee that Prince Albert has already lost in excess of $3.3 million in annual tax revenue as a result of mill closures. Enrolment in local schools has also declined considerably. One estimate puts the loss in the number of students at over 1,000 throughout Prince Albert’s school system.[4]

Community leaders and labour leaders who appeared before the Committee generally espoused the view that governments have not acted with sufficient haste, nor have they provided adequate resources, to help the many communities significantly affected by the downturn in the forest products industry. As Joe Hanlon put it in his appearance before the Committee:

The people of White River and Dubreuilville and other communities who are affected with the same fate deserve more. These are real people, real families and real communities. In many of these small communities there are no other jobs. How can these small northern Ontario towns afford to continue to provide public services if no one can pay the taxes? How can these people and families continue to live there? They can’t, their EI will run out and they’ll have no other means of income.[5]

The Community Development Trust, a 3-year $1 billion investment by the federal government, was set up to help communities and workers facing adjustment challenges in the forestry and manufacturing sectors. Each province will receive $10 million and each territory will receive $3 million, with the balance of the funding allocated on a per capita basis. It is expected that funds from the Trust will be used by provinces and territories to help with worker retraining, to develop community transition plans, and to support economic diversification. It is yet too early to report on which projects are being financed and what outcomes are being achieved with the funding provided through the Trust. Some witnesses that appeared before the Committee expressed concerns that the Community Development Trust is too small, and its objectives too broad, to significantly help Canada’s beleaguered forest communities. Others expressed the hope that provinces and territories would use the funds provided through the Trust to help workers affected by the downturn in the forest products industry.

Contributing Factors to the Crisis Facing Canada’s Forest Products Industry

A number of factors, both domestic and international, have led to reduced production, a decline in profitability, mill closures and job losses in Canada’s forest products industry. These include the downturn in the U.S. housing market, intensification of global competition, rapid appreciation of the Canadian currency, productivity deficits, etc.

U.S. Housing Market

The U.S. residential construction sector has long been the key market for Canadian softwood producers. Recently, demand for wood-fabricated materials, such as lumber and wood panels, has dropped considerably as a result of the slowdown in the U.S. housing sector. U.S. housing starts have declined by 27% year-over-year in 2007. Canada’s wood exports to the U.S., in turn, have declined by about 25%. Competition from abroad, most notably from Chinese producers of plywood, has exacerbated this decline. According to Natural Resources Canada, prices for framing lumber in February 2008 reached their lowest levels since 1991.

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Collapsing Demand for Newsprint and Intensification of Global Competition

Canada has traditionally been an important producer of newsprint. North American demand for newsprint, however, is collapsing, which is putting enormous pressure on Canadian producers. Indeed, demand has fallen by over 30% since 2001 and is expected to continue to fall as consumers in industrialized countries increasingly reject newspapers in favour of the internet and other electronic media. For example, Natural Resources Canada reports that February 2008 marked the 57^th straight month of year-over-year declines of U.S. newsprint consumption.

Moreover, Canadian newsprint producers find themselves unable to compete against low-cost producers in Asia and South America, and as a result are being crowded out of this once lucrative market. Many witnesses who appeared before the Committee firmly believed that the future for Canadian newsprint production is decidedly bleak.

Appreciation of the Canadian Currency

The Canadian dollar has risen from a low of 62 U.S. cents in January 2002, all the way to parity (and beyond) in less than 6 years. The rapid appreciation of the Canadian currency vis-à-vis that of our main trading partner has significantly harmed the profitability of Canadian forest companies since most forest products are priced in U.S. dollars, whereas primary inputs (fibre, labour, energy) are priced in Canadian dollars. Most forest products companies found themselves simply unable to adjust quickly enough to the rapid run-up in the Canada/US dollar exchange rate.

PricewaterhouseCoopers estimates that each one-cent increase in the average annual value of the Canadian dollar costs the Canadian forest products industry about $500 million.[6] The strength of the Canadian dollar vis-à-vis the American dollar has, according to the industry, negatively affected the competitiveness of Canadian firms in the short-term, with the result that most of the rationalization in the newsprint industry took place on the Canadian side of the border.

Underinvestment

Several witnesses told the Committee that part of the reason why Canada’s forest products industry is currently in trouble is because, for too long, it underinvested in research and development, new technologies and new mills and equipment. There are many plausible explanations for this; for example, it has been suggested that throughout the previous decade, many Canadian forest products companies relied on a low Canadian dollar as their main competitive advantage and failed to make the necessary investments to improve their productivity and shore up their international competitiveness.

While some Canadian forest products companies have upgraded their plants and equipment, it remains a fact that the capital stock of Canada’s forest industry as a whole is older and less productive on average than that of its global competitors.[7] This has made Canadian forest products companies more susceptible to market downturns and less capable of competing globally. The current strength of the Canadian currency versus the American dollar presents an opportunity for some Canadian forest products companies to purchase cutting-edge machinery and equipment from U.S. manufacturers and thus improve their competitiveness.

Mountain Pine Beetle Epidemic

British Columbia is in the throes of a mountain pine beetle outbreak beyond any bark beetle epidemic recorded in North American history. The mountain pine beetle has already devastated large swaths of British Columbia’s lodgepole pine forests. Natural Resources Canada reports that at the current rate of spread, approximately 50% of B.C.’s mature pine will be dead by the end of this year, and 80% (representing roughly 1 billion cubic metres) will be dead by 2013. The consequences of this epidemic will have long-lasting consequences for British Columbia’s forest industry and affected communities.

Having already crossed into Alberta, the epidemic threatens to expand further into Canada’s boreal forest, threatening ecosystems and the economic well-being of many other forest-dependent communities.

The Government of Canada in Budget 2006 allocated upwards of $200 million to combat the mountain pine beetle (MPB) infestation and to help the industry and affected communities manage the economic impacts of the infestation. Half of that amount went to NRCan to fund various MPB initiatives (see Table below). The remaining $100 million was allocated to Western Economic Diversification ($56M) and Transport Canada ($44M), to provide needed infrastructure improvements and to support enhanced economic diversification.

Source: Natural Resources Canada (April 16, 2008).

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Fibre Costs

Several witnesses identified high wood fibre[8] costs as a competitive disadvantage for some Canadian forest products companies. Fibre costs vary regionally across Canada. In the B.C. Interior, wood costs are notably very competitive largely because of the significant but temporary increase in harvest volumes resulting from the mountain pine beetle infestation. By contrast, fibre costs across much of Eastern Canada are considered high by international standards, particularly when compared to the cost of fibre in emerging economies such as Brazil, where good quality trees grow very fast. Some witnesses suggested that the cost of fibre in Quebec is amongst the highest in the world.

Softwood Lumber Agreement

There is no clear consensus on the impacts of the softwood lumber agreement between Canada and the U.S. (SLA) on Canada’s wood producers and the communities that depend on them for their survival. Some witnesses, such as Bob Matters, Chair of the Steelworkers’ Wood Council, told the Committee that the SLA has harmed Canada’s industry and should be revisited if not abandoned altogether.[9] Others, such as John Allan of the Council of Forest Industries, said that the SLA was by far preferable to ongoing litigation and dispute with the United States.[10]

High Transportation and Energy Costs

The cost of transporting wood fibre and finished products, and the cost of the energy required for processing, represent a significant part of total production costs for the Canadian forest products industry. The Forest Products Association of Canada (FPAC) estimates that “transportation costs are the sector’s second largest cost component.”[11] Soaring fuel prices in recent years have obviously also helped to drive up the cost of transporting forest products.

Energy costs are also an important cost driver. The pulp and paper sector is the largest industrial energy user in Canada. While the sector generates some 60% of its own energy needs from renewable sources, it has been hit hard by higher prices for fossil fuels and climbing industrial electricity rates. Despite these circumstances, some regions of Canada are still benefiting from competitive energy rates that, in the opinion of FPAC, give Canada a genuine global advantage in the production of softwood fibre.[12]

Summary

While many of the factors outlined above were and remain largely outside the control of the industry, at least one witness felt that the severity of the crisis currently facing Canada’s forest products industry can be explained by structural factors.[13] Amongst the factors cited, by far the most important is the Canadian industry’s focus on the production of low-value products such as newsprint and lumber for export to the U.S. Another witness suggested that Canada’s forest products industry is struggling to be competitive because it has for too long been on “automatic pilot.”[14]

As will be explored later in this report, it is critical that the industry build on its strengths and expand into new value-added products and new markets, including the domestic market, if it is to survive and thrive.