Industry and Communities in Transition
The past few years have brought sweeping change to the companies and communities that depend on Canada’s forests. Changes in timber supply, technology, exchange rates, input costs and world markets are forcing the industry to examine how it operates, what it produces and where it stands in the marketplace. Costs are rising, demand is shifting, mills are closing, firms are restructuring. And forest communities are caught up in the tide, their futures shaped by the forces of change.
What are these forces altering the forest sector? How are they influencing industry competitiveness? What of the communities at the heart of the sector? How are they weathering the transitions? How are governments and firms responding and preparing to meet the future? In answering these questions, this article paints a picture of Canada’s forest sector today—coping with transition, readying itself for the future.
The Forest Industry: Many Industries
Though it is common to refer to Canada’s “forest industry,” the term is something of a misnomer. Far from being a single industry, the sector consists of many mini-industries, most of which fall into two groups: wood products, and pulp and paper. The wood products industry includes lumber, panels, engineered wood products and other value-added items. Pulp and paper covers market pulp, paper products (for example, newsprint, printing and writing paper) and paperboard products (for example, boxboard, containerboard). When all product areas are combined, Canada is the world’s number-one exporter of forest products, responsible for
17 percent of global wood exports.
The forest industry varies according to region as well. Eastern Canada is dominated by pulp and paper, while the west is more focused on wood products. Quebec, Ontario and British Columbia are the provinces with the highest numbers of forest workers. The Atlantic region, Quebec and British Columbia are the most forest-dependent regions, with a large share of their economy based on the sector.
Key forest exports also vary by region. The United States is by far the largest buyer of Canadian forest products, purchasing 87 percent of our wood product exports and 72 percent of our pulp and paper exports in 2004. But reliance on U.S. markets is greater in eastern Canada than in the west. Unlike the eastern provinces, British Columbia ships nearly a quarter of its wood product exports offshore and fully 60 percent of its pulp and paper exports.
The Forces of Change
With unfortunate timing, a series of domestic, market and trade forces are converging on the forest sector, brewing what some observers have called a “perfect storm.” These forces are shaking the competitiveness of the forest industry, a critical part of Canada’s economy, and threatening the future of forest communities.
What’s driving change? Domestic forces:
Market forces:
Trade forces:
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Domestic forces
A steady, sufficient supply of low-cost wood is an essential ingredient for a competitive forest sector. But over the past few years, Canada’s fibre supply has been changing. In some regions, less wood is available for harvesting because of provincial policies to reduce the amount cut and to protect non-timber values. Quebec, for example, is dropping its annual allowable cut (AAC) by 20 percent over three years. In other regions, such as Ontario, accessibility is an issue. Supply near the major mills is dwindling, drawing the industry northward to stands that are more costly to harvest. In the east, mills in New Brunswick and Newfoundland and Labrador are reporting wood shortages. In the west, some areas cleared for oil and gas exploration are not being replanted, which may affect future AAC levels. The British Columbia interior, for the moment enjoying greater supply from the salvage of beetle-infested wood, faces serious shortages once the salvage is over. (See “The Economics of Infestation” in this report.)
Technology is another force reshaping how the forest industry does business. Technology is, in many respects, a boon. It has enabled more efficient use of what is cut. It has helped companies become more productive and compete with global producers. It has led to more value-added products and improved wood panel products, especially OSB (oriented strandboard), laminated beams and I-joists. Yet technology has brought challenges as well. It has taken a bite out of employment, with fewer workers needed to cut and process wood. Workers now need more education and different skills, which means upgrading and training. Also, because of technology, low-quality fibres from other countries are now more useable for more products, eroding a long-time market advantage for Canada—fibre quality.
Finally, the escalating cost of energy, transportation and other basic inputs has been taking a toll on companies. Energy costs have been a factor in many recent mill closures, especially in Ontario, where the price of electricity has skyrocketed by up to 30 percent. High fuel prices, which affect logging, road building and transportation, have hiked the cost of delivered wood, especially in Ontario and Quebec, where timber is often trucked long distances to mills.
Market forces
The global forest products market has been in flux for some time now. Demand is falling for some of the mainstays of Canada’s industry. Newsprint, for example, has been hit hard by declining newspaper circulation and the rise of the Internet. At the same time, demand is growing for wood products such as OSB, which has rapidly gained market acceptance.
The geographical lines of the export market for forest products are being redrawn as well. The pulp industry, for instance, is shifting toward Asia, where booming economies are hungry for paper. At the same time, Canada is facing stiff competition from low-cost producers in Russia, Asia and South America. These operators, many of which harvest from fast-growing plantations, often have newer, larger, more efficient mills; lower labour costs; and little in the way of social and environmental protections compared to Canada. What do all these factors add up to? Tougher export markets, to the detriment of Canadian suppliers.
Trade forces
The softwood lumber dispute, which has disrupted trade between Canada and the United States for several years, remained unresolved at the beginning of 2006. However, on April 27, the Prime Minister announced that Canada and the United States had reached an agreement-in-principle to end this long-standing conflict. When finalized, the agreement will result in the end of U.S. duties on Canadian exports of softwood lumber and see some 80 percent of the duties returned to Canadian lumber producers. U.S. softwood lumber duties have cost Canadian forest companies, many of them in British Columbia, more than $5 billion. Some companies have compensated for this by decreasing their unit costs; others have had to shut down their operations.
In addition, the industry has been hurt by the stronger Canadian dollar. As our currency appreciates relative to the U.S. dollar, our products become more expensive south of the border. This is no small matter given the huge proportion of our forest product exports that go to the United States. According to estimates from the Forest Products Association of Canada, for every cent our dollar gains, there is a $528 million drop in revenue for Canadian forest companies.
Industry in Transition
The different sectors of the forest industry are reacting to these forces in different ways. The wood product sectors are faring best, particularly in western Canada. There, lumber capacity is expanding because of the large amount of beetle-killed timber entering the wood supply. Wood panels, especially OSB, are enjoying steady market growth and healthy investment. Capacity is increasing in this sector and large OSB mills are springing up. The west is capitalizing on its proximity to Asia, increasing exports to China and other booming economies. Also, western forest companies are continuing to consolidate, creating bigger, more efficient operations that can better withstand current market forces.
The picture is grimmer, though, for pulp and paper, the backbone of the industry through much of eastern Canada. The pulp industry is saddled with steep production costs, largely because of expensive energy; high delivered wood costs, especially in the east; and production inefficiencies arising from small, aging mills. Add to this low levels of new investment in the industry and growing competition from low-cost producers and plantations abroad, and it is no surprise the Canadian pulp sector is struggling.
Newsprint is not faring much better. Sinking demand has led to a series of mill closures and heavy job losses, again with the east bearing the brunt. Some newsprint mills are switching to other types of paper production, a good move with exports of printing and writing paper on the upswing. Yet, this shift has resulted in lower profit margins, causing Canadian production of some paper grades to cease.
In short, the sectors and regions of Canada’s forest industry are performing differently in the current market. The east is suffering more as a result of its struggling pulp and paper industry and reliance on U.S. markets. The west is in better shape because its soft pulp and paper market is offset by a somewhat healthier wood products industry. But regardless of how the regions are weathering the storm, there is no question that the Canadian industry as a whole—and therefore the Canadian economy and society as a whole—is being buffeted.
Snapshot of the East: Reeling from Change The dozens of communities in northern Ontario that rely on the forest industry have been especially vulnerable to recent economic conditions. Shutdowns have put thousands out of work and are sending some single-industry communities into a tailspin. In Kenora, Red Rock, Dryden, Thunder Bay, Terrace Bay, Kapuskasing and other centres in Ontario’s north, residents are facing huge adjustments due to layoffs, closures and limited prospects. The same forces behind shutdowns across the country are responsible for the rash of closures in northern Ontario. But one condition is worse for Ontario—the high cost of energy. Electricity prices have skyrocketed in the province, to the point where energy makes up 30 to 40 percent of the cost of getting wood from the forest to the mill. For many companies in northern Ontario, energy has become the make-or-break number on the balance sheet. For residents of Kenora, a town of 16 500 near the Manitoba border, the lead-up to Christmas 2005 brought devastating news. One day before Squamish, a B.C. town of the same size, learned its pulp mill would close, Kenora received parallel news. Abitibi-Consolidated said it would permanently close the town’s newsprint mill, leaving 390 people without work. The closure was one of two announced by Abitibi that day, the other in Stephenville, Newfoundland and Labrador. Energy costs were the main reason behind the closure. Abitibi spent the fall of 2005 exploring ways of lowering costs to keep the mill running at a smaller capacity. The company even asked employees to take a 20-percent wage cut while it looked into co-generation to reduce energy costs. But talks broke off in December. Abitibi CEO John Weaver said the decision to close the mill was difficult. “However, these steps are clearly necessary as we continue to face softening demand in the newsprint segment, increasing energy costs and a very strong Canadian dollar.” Several weeks earlier and 500 kilometres east, forest workers in Thunder Bay had heard a similar announcement. In late November 2005, Cascades said it was closing its coated paper plant; 375 workers were affected. The company cited a similar list of reasons: falling prices for fine paper, reduced demand, the higher cost of raw material and energy, and the strong Canadian dollar. Late January 2006 brought more bad news to Thunder Bay, this time from South Carolina-based Bowater. Another 280 people would lose their jobs because of a kraft mill shutdown. Said Bowater’s Don Campbell, “Costs to operate this kraft mill have deteriorated and are at unacceptable levels right now, mainly due to high energy costs, including electricity, but also natural gas, and then the high and unacceptable fibre costs.” As often happens, the closure will affect other operations, in this case, a Buchanan-owned sawmill that had long shipped wood chips to Bowater. What does the future hold for the forest-based companies and communities of northern Ontario? At this point, it is hard to say. Industry and unions are lobbying the province for measures that will, among other things, ease the burden of high electricity prices. Around Kenora, there is even talk of separating from Ontario and joining Manitoba, where energy is abundant and half the price. In the meantime, efforts are underway to alert urban Canadians to what the Toronto Star has called “a quiet devastation . . . throughout Northern Ontario’s forest industry.” |
Communities in Transition
By all accounts, 2005 was a tough year for forest communities in Canada. According to an analysis conducted by the Canadian Forest Service of Natural Resources Canada, more than 50 mills announced closures or significant downsizing, which resulted in nearly 9000 job losses. In fact, since 2003 mill closures have resulted in more than 16 000 announced layoffs across Canada. Many of these jobs were high-paying and based in communities where the forest industry is a cornerstone of the economy.
In these communities, non-forest businesses feel the loss as well. Each job in the forest industry supports roughly two indirect jobs. When well-paid forest workers lose their jobs, the community’s income drops and other sectors, such as retail, the housing market and the service industry, fall off. The community as a whole is left with an eroded tax base, an outflow of job-seekers and, in some cases, few prospects for economic growth. The full effects of mill closures may take years to surface. By then, especially in remote communities with few alternatives to forestry, the effects may be irreversible.
Pulp and paper has been hardest hit by recent changes in the forest sector, and eastern Canada, with its reliance on pulp and paper, has been the hardest-hit region. But no part of Canada has been exempt. From Grand Falls and Stephenville in Newfoundland and Labrador, to Prince Albert, Saskatchewan, to Port Alberni, British Columbia, communities are facing shutdowns and layoffs, and the economic instability, retraining and population loss that inevitably follow. Northern Ontario, home to some of Canada’s most forest-dependent communities, has been especially pummelled. So has Quebec, where the sector is readying itself for even more job losses in the coming years as reduced AACs take effect.
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| © Natural Resources Canada; West Fraser Sawmill |
Even communities where the forest industry is still healthy have their troubles. Increasingly, the rural and remote areas where companies operate are losing residents, especially young people, to the cities. This migration will mean labour shortages when today’s aging workforce starts to retire. There are two related complications. First, hiring is low on the agenda for most forest companies faced with downsizing and closures. And second, forestry is still widely dismissed as a low-tech, low-skill sector, when the opposite is true: more than ever, the industry needs a technology-savvy, skilled workforce.
One way to address these labour problems is to mount a recruitment effort that shows the industry for what it is—a leading-edge, world-class employer. Another, some say, is to tap more effectively into Aboriginal communities. Many of these settlements are already located in the remote areas where the industry operates, and many have a growing youth population. Aboriginal communities present an excellent opportunity—a ready supply of local young people who, given the right education and training, could buoy up the forestry workforce.
Aboriginal communities have some unique concerns. Their economic ties to the forest are strong: forestry and related businesses are the main economic activity and source of earned income for 80 percent of First Nation communities. For these communities, the pressing question, through all the industry changes, continues to be who owns and manages the forest resource. In regions where their ownership is confirmed, Aboriginal people are increasingly managing their own forests and running their own operations. In regions where ownership has yet to be settled, the outcome of land claims could greatly affect the amount of forest land under Aboriginal stewardship. How this land is managed and whether it remains, or becomes, commercially available will have an overall effect on timber supply. Certain timber licences may be impacted by changes to who is responsible for managing and harvesting. In the long run, Aboriginal entitlement to forests will usher in yet more transitions for forest companies and the communities that depend on them.
Snapshot of the West: Coping with Change Nestled between the waters of Howe Sound and the coast mountains, Squamish, British Columbia, is a kind of bellwether for Canada’s forest industry. Once a thriving forestry town, this deep-water port northwest of Vancouver has gradually bid the industry farewell. First, there were cutbacks in local logging. Then, in 2004, a major sawmill owned by Interfor was closed and dismantled, throwing 120 people out of work. In December 2005 came the knock-down punch: the closure of Woodfibre, a 93-year-old pulp mill owned by Western Forest Products (WFP), leaving 323 full-time workers unemployed. WFP’s decision to close Woodfibre speaks to the changes sweeping Canada’s forest industry. The pulp mill had been on shaky financial footing for years, said the company. Rising energy costs were a factor, as was the weakening pulp market. WFP made several attempts to sell the mill, all of them unsuccessful. For WFP, the closure of Woodfibre is part of a larger deal with Canfor. The wood chips WFP once sent to Woodfibre will now go to the Port Mellon pulp mill in Howe Sound, run by Canfor and Oji Paper Canada. In exchange, WFP will take over Canfor’s logging division on northern Vancouver Island. The deal means a more secure fibre supply for Port Mellon, a larger mill than Woodfibre and one that produces both pulp and paper. It is also an important step in WFP’s plan to move from pulp to the more profitable lumber sector. WFP’s decision is typical of the path the forest industry is taking in western Canada. Staying competitive means consolidating, streamlining and focusing operations where they are most profitable. But it also means shaking up the communities where the forest industry does business. “This is a difficult decision as many long-term employees are affected,” said Reynold Hert, WFP’s president and CEO, when announcing the closure. “Our team at Squamish has worked hard to improve operations, but it is a relatively small mill by industry standards with outdated technology and high costs.” As for the town, Squamish has been working hard to switch its economy from a traditional resource base to a more diversified one. And the future looks promising. Squamish is in a better position than some other centres to cope with the shift away from forestry. For one thing, the industry’s exit from the area has been gradual. For another, the town’s location between Vancouver and Whistler makes it an ideal service and bedroom community for both. Plans are currently afoot to establish a privately funded alternative university in the area. Furthermore, a myriad of natural attractions has turned Squamish into a premier outdoor destination, one that will enter the world spotlight in the run-up to the 2010 winter Olympics in Vancouver. The closure of Woodfibre, a fixture of the community for nearly a century, remains a harsh reality in Squamish, especially for the hundreds who lost their jobs. In this town, as in so many forest towns across Canada, change in the forest industry means change in the community. In Squamish, the community is doing what it can to cope with change, looking beyond the mill to a different way of living within the forest. |
Strategies for Change
Governments and industry have been fighting to keep up with the changes affecting the forest sector. Provincial governments, as the jurisdictions responsible for 77 percent of Canada’s forests, have introduced policies and programs to assist the industry and communities. The federal government also has an important role to play, given the forest sector’s importance to the national economy. Industry, for its part, has been modifying its structure and operations to become more competitive. Here is an overview of the strategies that may help Canada’s forest sector steer through these troubled times.
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Papiers Masson: One paper machine replaces three (Photo: R.Gal, with permission from Papiers Masson) |
Provincial / territorial governments
At the provincial and territorial level, governments are concentrating on leveraging new capital, ensuring the long-term sustainability of wood supply and enhancing value-added manufacturing. Especially in the east, the provinces have been stepping up with policies and funding to help industry and communities change with the times. Ontario announced a $350-million loan guarantee program in June 2005, followed by a bundle of measures to combat some of the industry’s worst problems. Among them are conditional grants to leverage capital for value-added manufacturing and for programs that promote efficient fibre use, worker training, electricity conservation and co-generation. In February 2006, the province pledged another $220 million to subsidize the cost of access roads and reduce stumpage fees.
Similarly, Quebec has introduced various packages to help the forest sector adjust, especially to supply reductions in the province. The most recent measures, unveiled in the government’s March 2006 budget, earmarked $925 million for the sector. Besides supporting new product development, technology transfer and market diversification, Quebec is also addressing social change—helping workers return to school or the labour market and providing training and upgrading.
New Brunswick, where the forest industry is central to the economy, has likewise put together an assistance package. Besides maintaining the annual allowable cut, New Brunswick is decreasing pulpwood royalties paid to the province. It has also announced strategies to leverage capital, eliminate capital tax, cut transportation costs, promote bioenergy and upgrade workers’ skills.
Federal government
Since 2002–2003, the federal government has invested $531 million in the forest sector in a number of areas:
- offshore market development
- funding for forest industry research institutes
- community and worker adjustment
- advocacy and litigation for the softwood lumber dispute
- mountain pine beetle infestation
- community adjustment in Quebec.
The Canada Wood Export Program, a five-year partnership with the wood industry begun in 2002, concentrates on diversifying Canada’s offshore wood exports. Projects funded by the program have led to higher overseas sales of products such as prefabricated homes, and have boosted exports of Canadian wood products to China by more than 76 percent. Another federal program, Value to Wood, encourages research and technology transfer in value-added production.
Industry
On the front line of current changes, the forest industry has had to react quickly and decisively to shore up its competitiveness. Its most visible strategies have involved restructuring: streamlining operations in the east, consolidating operations in the west. This restructuring is far from over. Observers predict more closures and amalgamations ahead before the sector as a whole can return to profitability.
Forest companies are also working to diversify their products and their markets. Some mills are shifting from newsprint to higher-margin papers. Some companies are getting out of pulp and paper altogether to concentrate on the more robust wood products industry. There is growing interest in bioenergy which, besides easing energy costs, could become a product line. And the industry continues to develop new niche products and seek new markets for Canadian forest goods.
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Installation of biogas energy unit |
Improving productivity is the other key to remaining competitive. Recent moves to close small, outdated, inefficient mills will help with overall productivity. However, innovation is crucial. Forest research institutes, universities and other R&D bodies are more important than ever in helping the industry find ways to become more efficient and gain more value from Canada’s wood. (See “Innovation and Competitiveness in Canada’s Forests” in this report.)
To chart the industry’s future course, the Forest Products Association of Canada (FPAC) has proposed an agenda of changes that industry and governments can make to ensure a healthy, competitive forest sector. The agenda is outlined in the February 2006 publication Industry Vision: Building Towards the Future.
Building a Strong Future
The changes sweeping through Canada’s forest sector are not over yet. Rationalization, especially in the pulp and paper industry, is expected to continue over the next few years as companies respond to market signals and adjust their production accordingly. And forest communities, especially those with few economic alternatives, will continue to feel the effects.
Restructuring in Canada’s forest sector is unavoidable. But it is also necessary if the industry and the communities that depend on it are to remain healthy and competitive in the long term. This period of transition is steering the sector on a new course, opening up new ways of capitalizing on Canada’s valuable forest resources. Tapping into expanding markets such as China, developing Canada’s value-added wood industry, embracing innovation and new technologies, increasing bioenergy—these are just some of the opportunities that can help forest companies and communities strengthen and rebuild for the future.
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© Her Majesty the Queen in Right of Canada 2006 |