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Clear-cutting the lumber business

 

Andrea Mandel-Campbell, Macleans, January 23, 2006.


Canadian towns are being felled by a forestry industry crisis that is cutting a swath through the country's rural backbone

When Domtar called an early morning meeting of its Cornwall paper mill workers on the last day of November, Danny Acheson knew it couldn't be good news. A year before, the forestry products company had cut 390 workers. And for months, the Ontario town of 45,600, which grew up around the 100-year-old fume-belching icon, had been waiting for the other shoe to drop. Still, the paper machine operator and father of three never imagined the mill would be permanently closed, laying off its remaining 520 workers. "The crowd let out a gasp. You could feel the air leave the room," says Acheson. "You expect it, you prepare for it, but there is no preparing for an announcement like that."

As Cornwall reels in disbelief, towns from Miramichi, N.B., to Squamish, B.C., are being felled by an industry-wide crisis that is cutting a swath through the country's rural backbone. In the last 1 1/2 years, some 11,400 sawmill workers and machine operators have lost their jobs in 46 mostly remote, often single industry, towns. Russell Horner, chief executive of Vancouver-based Catalyst Paper Corp., estimates there is a mill closure every four days, with no signs of letting up. "I've been in the industry 31 years and I have never seen anything like this. It's unprecedented."

But while alarming, the rash of closures comes as no surprise. Industry leaders have warned for months, even years, that the $80-billion sector would face a day of reckoning after spending the better part of a decade grappling with tectonic shifts in the global forestry business. In recent weeks, provincial and federal governments have coughed up more than $2 billion in aid to staunch the bloodletting. But as Tembec, Canada's third largest integrated forester, teeters on the brink of bankruptcy, and with another 20 to 30 mills in danger of closing, the bailout effort is a Band-Aid solution at best, say observers.

The aid targets the damage caused by the softwood lumber dispute with the U.S., a skyrocketing loonie, and surging energy costs in Ontario. But it doesn't cut to the root of the problem: an industry littered with small, unproductive mills that are among the oldest and costliest on the planet; an industry that doesn't boast a single company among the world's top 20, despite access to vast timberlands; an industry that's now grappling with a legacy of mismanagement and overcutting, that is now forcing Quebec, for instance, to reduce its harvest by 20 per cent over the next three years.

It's a stark contrast to comparatively tiny Finland and Sweden, which boast companies like Helsinki-based Stora Enso with sales of US$15 billion -- three times that of Canada's largest forestry products company, Abitibi-Consolidated. The Finns harvest 65 per cent more lumber per hectare than operators on New Brunswick Crown land, while Swedish labour costs are less than one-third those of coastal B.C.'s. The two countries' state-of-the art mills are twice the size of the average Quebec plant, equipped with world-leading, Finnish-made machinery (Canada does not have a single equipment manufacturer of note).

Not surprisingly, the Scandinavians are leading the charge into new, low-cost regions, that are revolutionizing the industry and creating huge competitive challenges for Canada. Fast-growing tree farms in Chile and expansion into unexploited forests in Russia are pushing down global prices and reconfiguring traditional trade flows. Others are also getting into the act: in a sign of the times, U.S. forestry giant, Weyerhaeuser, recently acquired a 321,000-acre eucalyptus plantation in Uruguay. Not far away, Spanish and Finnish companies are investing US$2 billion to build the world's largest pulp complex, which will supply the biggest, fastest paper mill in the world, being built north of Shanghai.

In a reversal of global trends, financially strapped Abitibi was recently forced to sell its 50 per cent stake in Asia's largest paper company, thus losing its claim to being the world's leading newsprint maker. That title now belongs to the Norwegians. So why are the Scandinavians riding the global restructuring wave while Canada is being rolled? According to forestry experts, it comes back to public ownership of Canada's timberlands. Unlike Finland, where the land is privately owned, Canadian companies are subject to an outdated and onerous tenure system that has at once bred complacency and handcuffed their ability to compete. "There is a direct link between the tenure system and the current situation," says Pierre Desrochers, a University of Toronto geography professor.

Long seen as a tool to provide jobs in remote areas, the system has blocked consolidation in the industry by forcing companies to open mills where they have cutting rights while subsidizing harvests to keep sawmills open. Because they don't own the land, operators have no incentive to plant more trees than they have to or invest in new technology. As a result, Canada largely churns out commodity goods like sawed lumber, pulp and newsprint instead of high-end consumer products like tissue paper. "If we want to fix the industry we have to fix the tenure system," says Peter Pearse, forestry professor emeritus at the University of British Columbia.

It's not all bad news. Operators in the B.C. Interior are racking up record profits despite the costly softwood lumber dispute. Forced to cut costs in the wake of 27 per cent U.S. duties, companies began merging and building some of the biggest, most technologically advanced mills around. The rest of the industry will have to follow suit, says Horner of Catalyst Paper, or risk being "picked off by foreign operators." He estimates half the industry would need to be consolidated into one company for it to have the scale and scope to compete globally. "If we don't do this, the necessary restructuring is going to be much more painful and much more damaging," he says. "We need players that are going to come out of this as robust companies."

Ottawa, however, frowns on mergers, say those in the industry, while provincial governments continue to prop up obsolete and inefficient mills, compromising the sector's long-term sustainability. As for the tenure system, companies know it doesn't work but are loath to say so publicly for fear of angering the provinces, which are the regulators and owners of the trees. "There is a large commercial disincentive for companies to take on the provinces," says one industry rep. "Their capacity to punish is rather expressive."

It leaves the industry making vague calls for a "national forestry policy" that have so far netted loan guarantees that most companies can't use and stop-gap measures, as in the case of Ontario, to assume the cost of maintaining logging roads. When New Zealand faced a similar crisis in the 1980s, it privatized its publicly owned land and is now among the most competitive forestry operators. "New Zealand understood that without radical change, the industry was going down the toilet," says Avrim Lazar, president of the Forest Products Association of Canada. "Here, everybody's hoping the problem will get fixed on somebody else's watch."

 

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