Major cuts in forest mills in 2005
should help recovery in 2006, say analysts

Allan Swift (Canadian Press), AOL.ca Finance, December 27, 2005.

MONTREAL (CP) - A few feeble voices in the country's forest industry believe there will be a comeback in 2006.

Realistically, if there is a revival, it will come because the industry can't get any worse. In fact, wags have said before the industry had hit rock bottom and then dropped even further. Mills making lumber, pulp and paper right across the country have closed temporarily or permanently, putting thousands of workers out of a job.

A spokesman for the Communications Energy and Paperworkers Union estimates 10,000 job cuts were announced during 2005, some to take effect in early 2006.

The same challenges are hitting companies everywhere, to varying degrees: the higher Canadian dollar, declining demand for newsprint, heavy duties on lumber exports to the United States and competition in pulp and paper from emerging producers in Asia and South America.

This points to signs the pulp and paper sector is going the way of textiles - transferring to the Southern Hemisphere where trees grow faster and wages are lower.

An additional stress is hurting Quebec, where the government decreed as of April a 20-per-cent reduction in the amount of trees that could be cut, to allow the boreal forest to catch up to years of harvesting.

Analysts say Quebec, the leading pulp and paper region in Canada, now has the highest fibre costs anywhere in the world, due to a combination of stumpage fees, vast distances, and its smaller trees compared to B.C., the lumber leader.

In Quebec alone, the government estimates 3,800 direct jobs were lost in 2005 in the lumber, pulp and paper sector.

Ontario is also reducing the allowable wood cut, while electricity rates soar in the wake of deregulation. High gas and oil prices added to the industry's burden across the country.

Mills were also closed in the Atlantic provinces, and even the large Weyerhaeuser Co. pulp and paper mill in Prince Albert, Sask. will be shut down in the spring.

The only bright spot in the story is the solid wood industry of British Columbia, feeding trainloads of frame lumber to the housing boom in the United States.

Analysts say the B.C. lumber industry is more efficient, thanks to its large trees and because the B.C. government allowed the industry to consolidate into fewer sawmills that run flat out.

While newsprint has enjoyed seven consecutive price hikes since mid-2002, the additional revenue has been wiped out by factors like the rising Canadian dollar and a steady decline in newsprint consumption since 1987 in North America.

"The cost issue has been a very important factor this year," said Paul Leclair, chief economist at the Pulp and Paper Products Council.

"There's a bunch of factors combined that are hurting the industry significantly; I'd be extremely surprised to see profits this year."

Consultants PricewaterhouseCoopers said earnings by the leading Canadian forest companies collectively fell to a paltry $71 million in the third quarter, compared with $883 million earned a year ago.

Economist Louis Theriault, who did a study on the industry for the Conference Board of Canada, sees a brighter picture in the long term, but for the moment "we're in a state of absolute disaster. There's overcapacity throughout North America; there's plant closures as we speak."

Theriault said the pulp and paper segment has been operating in the red for the last six to eight quarters. "Collectively in Canada, it can't get worse," Theriault said.

Based on the Conference Board's belief the dollar will stabilize at around 81 cents U.S., Theriault said recent efforts to limit overcapacity by shutting machines and entire plants will start to pay off.

"When things get really bad you have to act decisively and take extraordinary measures to turn the bottom line around. It will be better in 2006, but it won't be the Klondike."

Spokesman Michel Vincent of the Quebec Forest Industry Council said the allowable timber reduction in that province will force more sawmill closures and the government will have to change laws to allow the timber allocated to a closed mill to be transported to another mill.

The laws, aimed at preserving jobs in one-industry communities, were changed in B.C. but not in Quebec, the country's second-largest but now increasingly inefficient timber producer.

"The crisis in the forest industry is so big we can no longer allow ourselves to keep up that forest-mill link," Vincent said.

He believes another round of consolidation is inevitable.

"We absolutely have to consolidate our mills into units that are bigger, more efficient; otherwise we shut everything down."

Craig Campbell of the forest practice of consultants PricewaterhouseCoopers said the pulp and paper industry is restructuring globally, with a shift from the northern to the southern hemisphere.

"We haven't seen a new big pulp and paper mill for a number of years, in Europe or North America," Campbell notes.

"In Indonesia, China and South America, all kinds of new low cost mills are coming on stream, while we're seeing shutdowns in traditional producing regions."

UBS Canada Research said in a report released Dec. 20 that announced paper and cardboard closures in Europe and North America just since July total 4.6 million tonnes, or 1.2 per cent of the world capacity.

Campbell said the B. C. lumber industry remains well positioned. It sells two-thirds of its lumber and wood panel production to the United States, which still makes most of the woodframe houses in the world.

From an investor point of view, Campbell too believes another consolidation is coming.

Last week, European regulators approved a $13.2-billion-US takeover of Georgia-Pacific Corp., second-biggest paper company in world, by commodities conglomerate Koch Industries Inc.

Campbell believes Koch will probably sell off pieces of Georgia Pacific and invest in other facilities of the paper giant.

"We'll see more of this happening, as shareholders realize the status quo isn't an option in terms of adequate returns."

Some forest mill closures announced in 2005:

-Abitibi Consolidated: to close Kenora, Ont., and Stephenvile, N.L., announced in December; 334,000 tonnes of newsrprint capacity; some 600 jobs.

-Domtar: Announces in December 1,800 job cuts, including closure of historic pulp and paper complex in Cornwall, Ont., two sawmills in Quebec and two paper machines at Ottawa; Also pulp and paper mill temporary closures at Lebel-sur-Quevillon, Que.; 425 jobs.

-Weyerhaeuser Co. pulp and paper mill in Prince Albert, Sask. to shut down in spring, with 690 employees, as well as 120 cut from plant at Dryden, Ont.

-Western Forest Products, Squamish, B. C., pulp mill; 323 jobs.

-Norampac, paper machine at Red Rock, up to 175 jobs; Montreal plant, 215 jobs;

-Smurfit-Stone Container Corp., mills at New Richmond, Que., and Bathurst, N. B.; 565 jobs.

-Cascades Inc. shuts fine-papers machine at Thunder Bay, Ont., cuts 150 jobs.

The Canadian Press, 2005

12/27/2005 11:37 EST

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