Mergers and Acquisitions and Mill Closures in the Forest Sector

The rapid pace of mergers and acquisitions in the forest sector in previous years has not slowed in 2004-2005. Most of the transactions are occurring in western Canada as mills attempt to increase production efficiencies and reduce costs in order to compete in the global market. Most notable are the acquisitions of Riverside Forest Products by Tolko Industries Ltd., of Weyerhaeuser Company (BC Coastal Group) by Brascan Corporation, and of Weldwood of Canada by West Fraser Timber Co. Ltd. These purchases have reshaped the industry in the interior and coastal regions of British Columbia.

The past year has also seen a trend of mill closures in Canada. A number of factors have had an impact on the profitability of forest product companies and have sparked structural changes in the industry. These factors include the U.S. softwood lumber dispute, a higher Canadian dollar, increasing energy costs (particularly in Ontario), higher delivered wood costs, and increased competition from offshore producers.

Higher delivered wood costs and increasing energy costs are having a significant impact on forest products producers in eastern Canada. In 2005, delivered fibre costs for softwood pulp (chips and roundwood) are 60 percent higher in eastern Canada than in western Canada. Delivered wood costs in Ontario and Quebec continue to rise due to regional shortages of fibre. This trend will continue as governments reduce annual allowable cut levels, as they have already done for Quebec.

For some time, mills in Ontario have been protected from increases in energy costs through provincial price protection measures such as electricity rate contracts. However, these protection measures have been eliminated by recent legislation and, in the last year, electricity prices in Ontario have increased by over 30 percent.

Canadian Mill Closures (September 2004 to May 2005)

Mergers and Acquisitions in the Forest Sector
(June 2004 to May 2005)