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SubmissionForest Sector RenewalForest Sector Innovation ResponseIntroduction
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Over the past decade Canadian pulp and paper mills have invested $8 billion to achieve …
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These efforts have led to many innovations that have had positive impacts outside the forestry sector. In addition to the millions of dollars spent on in-house research, forest companies, in collaboration with provincial and federal governments, finance independent, pre-competitive research programs carried out by three industry research institutes - Paprican, Feric and Forintek.
These collaborative efforts have yielded a number of important results that include: mills that now have a greatly reduced impact on water quality; more energy efficient truck and transport equipment; environmentally sustainable forest practices that result in optimal use of the renewable resource; lighter-weight, less fibre intensive paper products; sawmills that are 30% more efficient, creating less waste and more efficient use of the forest.
Forecasts show that global demand for pulp, paper, paperboard, and wood products is expected to increase by between $US 4 to 7 billion annually over the next ten years. Canada's innovative adaptive attitude in forest products can be the basis for seizing opportunities in the world's growing market.
A more difficult global marketplace is putting increased stress on the sector
Global
competition is intensifying.New technology and the development of new capacity now allow countries that were our customers to become competitors and often to become world players.
Since 1990, Canada's share of world pulp and paper exports has dropped from over 40% to under 32%. Competition from substitute products is intensifying as new entrants gain market share at Canada's expense.
In the global pulp and paper segment, new technologies, and large investments have allowed new competitors to challenge Canada's position. Today, though Canada is still by far the largest exporter to the US, stronger growth by countries like Finland, Sweden and Brazil has given them the status of major players in the segment as well.
This story is repeated in the solid wood segment where excess international capacity and increased competition from new players has significantly eroded Canada's share, particularly in its primary export market in the US. In fact, New Zealand and Brazil lumber exports to the US are growing at 3-4 times the rate of Canadian exports.
This is reflected in lower margins and significant volatility in the return on capital for Canadian forest products companies. Over the past decade the average cost of capital for the sector has been between 10-12% while average return on capital employed has been just 5%.
Those funds that have been available have been used to upgrade the environmental aspects of the sector in response to new environmental regulations and productivity enhancing technology. But with the capital stock of the Canadian industry continuing to age relative to that of its new competitors, the inability of the Canadian sector to engage in a more wide-scale renewal of its plant and equipment will further weaken its competitive position in the global marketplace.
Canada's competitive access to markets is under threat from the increased use of tariff and non-tariff barriers, in all regions of the globe. Discriminatory "ecolabelling" requirements and preferential procurement policies are increasingly being used as non-tariff barriers. Tariff actions, such as the longstanding Canada-US softwood dispute, are also prime examples. Canadian softwood lumber exports to the US are valued at over $10 billion annually and, over the long-term, 70% of the anti-dumping and countervailing duties will be absorbed by the Canadian industry. Similarly, close to 10 million tonnes, or one-third of Canadian pulp and paper shipments, are destined for regions where tariffs remain an issue. On average, tariffs add an estimated $20 per tonne to the cost of Asian shipments and $50 per tonne to Latin American shipments. This puts the Canadian economy and the Canadians who depend on free trade in forest products in harm's way. Indeed, the current duties have already resulted in thousands of layoffs, both temporary and permanent.
The sector faces significant challenges with respect to the business climate, its research and development enterprise, and human resource needs.
All industries compete for capital in the same financial markets and investment funds will flow to those that provide the greatest return. Canada is one of the few major forest products producing nations that places a capital tax on its producers. For this highly capital-intensive industry this tax is particularly punitive and is a direct disincentive to the adoption of innovative technologies and to the renewal of its capital stock. It has been estimated that capital taxes can add up to 4 percentage points (depending on the provincial component) to the tax burden of certain plants and mills1. The announced capital tax reductions in BC and Quebec are a welcome start. However, it is critical that all capital taxes be eliminated.
1. The amount of capital tax as a percentage of net income before interest & taxes (NIBIT).
In a world of increasing competition the focus must be on jobs that can be sustained over the long term. Government's competition and economic development policies have slowed consolidation and prevented the closure of inefficient, higher-cost capacity. This allows old, inefficient capacity to crowd out new capacity, lowers the rate of return for the industry, and ultimately costs jobs. Moreover, Canadian firms are unable to achieve the economies of scale needed to compete in the world market. Consider that Canada's largest forest products firm is only one tenth the size of the world's largest firm, and that the three largest international firms have more sales than the entire Canadian industry combined. Where attempts have been made to rationalize high cost facilities governments, particularly provincial, have provided support packages in order to maintain employment in the region. History indicates that this approach only delays the eventual closure of a high-cost facility. The inability to close facilities limits the potential synergies from amalgamation. This inward-looking focus ignores the fact that eighty percent of the industry's production is exported.
Government regulates all key cost elements such as fibre, energy and transportation as well as environmental releases for the forest products sector. Current regulations center on command and control approaches and often ignore economic implications. In many cases there are significant degrees of overlap at the federal and provincial levels. This duplication results in an uncertain business climate and adds economic burden as a result of additional administrative, monitoring and compliance costs associated with having to respond to more than one regulatory regime. Moreover, current regulations are more often rules-based rather than results-based, and thus are needlessly inefficient.
More specifically, government regulations have the following shortcomings:
A lack of clarity in federal/provincial roles
The forest sector has expressed concerns over the disparity and duplication between federal and provincial environmental legislation for many years, particularly on air and water quality, environmental risk assessment, fisheries/fish habitat, and energy. While some improvements have been seen on this front through administrative agreements, there is no clarity over which order of government will be active in most areas of concern. For example, the sector is concerned about the increasing likelihood of new duplication between federal and provincial governments in controlling its air releases and managing species at risk.
Over emphasis on command and control approach and reporting burden
In many cases, regulations applied to the forest products sector are inflexible and create an unnecessary reporting burden. Prescribing the means rather than the desired outcomes of a regulation inhibits the sector's ability and efficiency to meet environmental quality objectives.
Prescriptive fibre access policies
94% of Canada's forests are publicly owned, primarily by provincial governments that regulate their use. Governments rely on the revenue generated from stumpage fees from wood harvests and other taxes and consequently follow a 'use it or lose it' approach in order to stabilize their revenue-generating potential. Harvest levels should be driven by economic and ecological conditions, not by a need to stabilize government revenue streams.
In some instances, in the interest of regional development, timber rights dictate to which mill the harvest can be directed. This practice results in the inefficient use of the forest resource and the inability to extract the most value from that resource. Timber allocation decisions should support efficient use of the resource and not be based upon political drivers.
Over regulation of energy
While more than half of the industry's energy is sourced from renewable biomass (production and wood waste such as bark), and some mills operate entirely self-sufficiently, purchased fossil fuels and electricity still supply 23% and 21%, respectively, of the sector's energy needs. Uncertainties around energy deregulation negatively impact the industry's ability to plan new investment and results in lost opportunities to reduce the industry's reliance on purchased energy.
A lack of a competitive transportation environment
Transportation represents over 25%-40% of the delivered price of the industry's products. Industry mills in rural areas, in the majority of cases, are served by only one railway at origin and truck transportation is not a viable option, often because there are insufficient trucks available to meet the demand. The current regulatory framework under the Canada Transportation Act fails to provide sufficient competitive options for these captive operations. This results in higher shipping costs and directly impacts the competitiveness of the Canadian forest products industry. The industry has recommended to the federal government proposals to amend the Canada Transportation Act to simulate a competitive transportation environment for shippers where one does not exist.
With increased environmental awareness in the global marketplace Canadian forestry practices are being scrutinized more than ever before. The industry's strong performance in managing the forests and environment must be advanced and recognized by both Canadians and the international community. For example, success in de-linking carbon emissions and production growth through a 19% reduction in CO2 emissions while increasing production 25% sets the pace for further progress. Continuing the industry's world-class stewardship is crucial given the serious impact that proper environmental practices have on this sector's social license to operate on public land and on its market acceptance at home and abroad.
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Towards a Vision for the Canadian Forest Products Industry The Canadian forest products sector will be…
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The industry's R&D spending, estimated to be $345 million in 2000, is less than half of that conducted by US competitors, and less than a third of the Scandinavian industry. In part, the smaller size of Canadian firms negatively impacts their capacity for in-house R&D, reducing the potential for developing more company unique competitive advantages. More recently, R&D adoption has been slowed by global overcapacity and low rates of return, resulting in insufficient investment in commercialization. As well, R&D efforts lack an overall strategic focus and coordination amongst the many government, research and industry organizations.
The forest sector's workforce is aging. The average worker in the pulp and paper industry is over 40 years of age and the proportion of workers 45 and older is projected to reach 35% by 2005. At the same time, the availability of a younger skilled workforce is diminishing, with enrolment in undergraduate forestry programs declining by 27% over the last four years. The decline in enrolment for such programs has been linked to an outdated image of the industry as a low tech, cyclical employer, environmentally irresponsible, with mills that are viewed as unappealing workplaces.
With continued commitment by the forest products sector and changes to government policy the rate of innovation can accelerate, thus ensuring continued success in the global market place
The Canadian forest products industry is still a major force in global markets and a leading innovator in the Canadian economy, however its rate of renewal has not kept pace with the speed of change in the marketplace.
This renewal must be based on a common vision that is industry led; market driven; inclusive of labour, local communities, academics, research institutes, NGOs, and partner industries; and, one that is shared by government at all levels. With a renewed vision, renewed partnership and a renewed business climate, the Canadian forest products industry can maintain and advance its status as a world leader.
The market opportunities, the entrepreneurial spirit and the innovative attitude needed for industry renewal are all present today but will not be actualized until the business climate in the Canadian forest products sector results in a sufficient return on capital investment.In the context of the global economy attracting investment requires both a competitive macro and micro economy. Attractive risk/return characteristics must be present at the country, industry, and company level. In the same manner that undisciplined business operations raise costs and erode the return on investment an inefficient business climate raises costs, cuts return and discourages investment. With an improved business climate returns on investment will drive R&D activity, human resource development, and innovation in the sector.
Improving the sector's financial performance to fund investments in Canadian communities, jobs and institutions
Widening its environmental lead
Speeding adoption and development of productive new technologies
Developing new products and markets to increase Canadian share of global trade in forest products
Investing more in human resources
Address the business climate by:
Address knowledge performance by:
{more on the R&D aspects of innovation are provided in the companion paper
titled "Accelerating Forest Sector Renewal: Significant, Sustainable, Innovative"}.
Address skills by:
By every important economic measure, Canada's forest products industry is a workhorse and a key building block for Canadians' wealth and well being in rural and urban economies across the country. It is the largest single employer, one of the largest contributors to Canada's trade surplus, the largest integrator of new technology and, with revenues of $55 billion, represents a full 3 percent of Canadian GDP.
Forest products is also one of Canada's most innovative and high-productivity sectors - twice as productive as Canadian manufacturing in total, with double the productivity of its closest competitor - the US forest products sector. By focusing on export markets and investing in technologies that improve product quality, business efficiency and environmental performance, the sector has been able to double its exports in the last 10 years, becoming Canada's largest export to Europe, and the 3rd largest to the U.S.
Canada's forest industry has also championed innovation by adopting world-class environmental practices, including an early decision to submit its forestry practices to the scrutiny of 3rd-party sustainability audits (known as 3rd-party forest certification). Through in-house research and in collaboration with universities and industry research institutes, the sector's environmental efforts have led to many innovations that have greatly reduced the industry's own environmental footprint, as well as having positive effects outside the forest sector. Key among the industry's environmental accomplishments is its climate change record, with a 19% reduction in total CO2 emissions in the last decade.
Originally founded upon Canada's natural comparative advantage of access to energy and a strong, low-cost fibre, this sector has grown to be a world class industry. With global demand for forest products to expand by $US 4-7 billion annually for the next decade, Canada needs to be there.
However, a more difficult global marketplace is putting increased stress on the sector, posing serious threats to Canada's competitive position. New technologies to process previously inferior fibre, and development of large-scale new capacity has allowed countries who were Canada's customers to become competitors, and often, to become world players, significantly reducing Canada's share of world trade. Since 1990, Canada's share of world pulp and paper exports has dropped from over 40% to under 32.
As a result, over the last decade the industry's return on capital employed (ROCE) has dropped to roughly half of its average cost of capital, and volatility has increased. Poor returns have limited recent capital expenditures for new technology to below depreciation rates, and reduced the availability of new risk capital. With the capital stock of the Canadian industry continuing to age relative to its new competitors, the inability of the Canadian sector to engage in meaningful renewal of its plant and equipment will further weaken its competitive position in a global marketplace. Moreover, the sector's ability to successfully respond to these pressures is also being limited by the increased use of tariff and non-tariff barriers in all regions of the globe, the most well-known of which is the devastating Canada-U.S softwood dispute.
To act on its challenges and attain its vision of being among the world's top three forest products nations, it is crucial that Canada's forest sector accelerate the pace of industry renewal and innovation. This includes: renewing capital equipment at a sufficient rate, increasing R&D potential, addressing its human resource shortage and continuing its lead role in promoting environmental sustainability practices.
Government policy reform will be a critical component, and often a precondition, to the industry's renewal efforts. The Canadian forest products sector therefore stands prepared to invest significant resources to work with government on key policy areas, including capital and corporate taxes, modernizing regulations to support the sector's global market positioning and greater support for market access, acceptance and development.
Canada's forest products sector is limited in its competitiveness by government policies that prevent the closure of inefficient, higher-cost capacity and restrict the rate of consolidation. This increases the need for capital and diminishes Canada's ability to approach the economies of scale already attained by competitor nations. At the same time, the level of Canadian capital tax versus its key competitors functions as a disincentive to the adoption of new technology and capital equipment - be it for product, efficiency or environmental improvements. Moreover, inefficient and duplicative government regulations contribute to the sector's (and Canada's) uncertain business climate, increasing the cost of industry inputs and production. This includes the need for outcomes-based regulation and for more competitive transportation and energy environments.
Canada's market opportunities, the entrepreneurial spirit and the innovative attitude needed for forest industry renewal are all present today, but will only be actualized when the business climate in the Canadian forest products sector results in a sufficient return on capital investment. To create the right business climate will accelerate the sector's pace of renewal we need:
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Date created: 2003-02-27 Last modified: 2003-11-16 |
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