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20th Anniversary PWC Global Forest and Paper Industry Conference

This year’s 20th Annual PricewaterhouseCoopers Global Forest and Paper Industry conference in Vancouver attracted another packed audience on May 10. And, as usual, we heard some of the brightest and b…

This year’s 20th Annual PricewaterhouseCoopers Global Forest and Paper Industry conference in Vancouver attracted another packed audience on May 10. And, as usual, we heard some of the brightest and best speakers, with sharp questions and frank opinions holding the rapt attention of 450 attendees. The focus was on financial performance and strategic issues. With newsprint and lumber at the very bottom of the cycle, this made for a heady mixture of tough talk for the Canadian Industry and an up-close analysis of the global competition.

Mike MacCallum, a former conference organizer, now retired from PricewaterhouseCoopers, gave us the perspective on how this conference first began. In BC, 1987 was a year of record profits and new mill construction at McKenzie and Gold River. But the industry was worried about stakeholder pressure, and local executives asked PwC to organize a conference to bring to BC an appreciation of increasing global competition. Two decades later, although many big name BC companies have gone, global competition is more intense than ever and still the biggest topic of the day.

Retired BC forest executive Mike Apsey noted that BC forestry has in fact changed over time, with a 12% set-aside, more public involvement and a detailed Forest Practices Code. He characterized the huge 10 million hectare pine beetle infestation in BC as ‘very challenging, but not a knockout’, with the timely interest in bioenergy projects as the wood becomes unsuitable for lumber or even pulp. On the international front, he felt that illegal logging remains the big issue and it can only be stopped by governments with the will to do so. Chain-of-custody certification and an International Agreement on Forests will be important control mechanisms. Canada should continue to champion these measures, and to propagate the world-wide vision that the health of the forest is the health of the planet. His message was: get rid of silos and deal with the issues as a sector, in concert.

As the Chief Economist at HSBC Bank, Stephen King, unlike his novelist namesake, managed to spin a tale that was far from fiction. He drew a parallel between the 1950s, when growth in Germany and Japan began to drive the world economy, and today, when the emerging markets in China and other parts of Asia and Eastern Europe are fueling global growth. Growth rates for 2006 in emerging markets were more than double the world average, both for consumer spending (7% vs. 3%) and investment spending (15% vs. 7%). This is a massive sea change away from US-driven growth. King characterized the new state of play as: “when the US catches a cold, the world goes shopping”. He concluded that countries which export commodities or capital goods will do well, as long as they can dodge the complex currency backwash. Many in the audience could only wish that the North American forest sector could jump on some more of this growth.

It fell to Craig Campbell of PwC to deliver the hard news for the Canadian forest sector: 2006 return on capital employed (ROCE) is estimated at 0.5% in Canada, 4.6% world average, 12.6% emerging markets. A CEO survey confirmed that a fundamental industry change is underway with demand growth moving east to Asia and the supply advantage going south: more mergers are expected. As for the local outlook he noted that more BC lumber mills will have to close. He felt that the widespread beetle devastation in BC provides a unique opportunity for a change in direction. He suggested that new engineered lumber products should be developed to take advantage of the difficult-to-mill dead-standing pine. And generating electric power from roadside waste-wood would provide a much-needed steady counterbalance to the cyclical lumber and pulp businesses.

Mark Connelly of Credit Suisse dished out the cold, critical view from Wall Street of the North American forest sector: capital spending is too high and misdirected; capacity gluts are hampering freesheet, newsprint and containerboard; the cycle and the poor performance persist; shareholder interests are disregarded; and thank goodness for shareholder activism. His view is that the paper sector is not particularly global: emerging market capacity expansions now go ahead without the need for North American partners, and he asked what value such partners could bring to the table. From the lively question session we heard that: the Canadian and US dollars could be at par within two years (King); BC forest energy projects will attract investors once fair rules are in place; and BC’s xenophobia has left its major companies as small players in a big world.

In the market outlook session, Russ Taylor, who runs International Wood Markets, said that new export taxes and 49-year leases may help regularize the 50m3/y Russian log trade with China. His excellent and detailed trade data happened to show the precipitous collapse of the BC 4×4 hemlock business with Japan: in the 1990s the coast logging sector was hit with a 2×4 (kiln-dried, laminated, European) and has not recovered to this day. Would a more globally owned BC industry have let this happen? The luncheon speaker was the Honorable David H. Wilkins, US Ambassador to Canada. In his affable, friendly way he acknowledged that more disputes on softwood lumber have arisen recently. “Both Governments are committed to keeping the agreement in place” were his carefully chosen words.

Two crackerjack afternoon sessions covered Strategic Issues and Executive Perspectives. Ville Jaakonsalo, CFO of Mets-Botnia gave us an account of their Uruguay project which will supply 1 million t/y eucalyptus pulp to Finland starting Q3 2007. Risk management including multilateral financing and FSC certification proved crucial for this project which is located on the River Plate next to a bridge to Argentina. Environmental polemics and misinformation from across the river have created some challenges, even for the determined Finns. John Williams, who heads SCA’s packaging business in Europe, noted that the capital intensive packaging manufactures are getting squeezed between higher input costs (energy, recovered fibre), and the consolidation of retail chains and their product lines. He summarized the recent mill shutdowns in Europe with a typically colourful English metaphor: “Who gets murdered? The people in the middle of course.” His proactive remedy for escaping this commodity trap was for packaging suppliers to create new value and make sure they capture it: he felt that packaging may develop into a supply chain business over the next decade.

“The pulp mill is dead; long live the biorefinery!” is a favorite saying of Hannu Ryppnen, CFO of Stora Enso Oyj, who believes that renewable raw materials and energy self-sufficiency are undersold attributes of the forest sector. He predicted that carbon accounting will become as important as financial accounting in the future, a theme echoed by Bjrn Stigson, president of the prestigious World Business Council for Sustainable Development. His organization has projects on illegal logging, forest stakeholder dialog, carbon management and sustainable procurement.

At the CEOs panel, Hank Ketcham outlined the low unit cost, high productivity lumber strategy being used by West Fraser Timber to ride-out today’s historic low prices. A cross-border competitor, Andrew Miller of Stimson Lumber in Oregon favours a minimal capital spending approach to mitigate the brutal, value-destroying lumber cycles. Jos Penido, head of Votorantim Celulose, gave the sunny view from the low cost, high margin world of Brazilian eucalyptus pulp. He predicted that newsprint will be made from long fibre, low lignin eucalyptus in 10 to 15 years, with growth rates of 50m3/ha/y. Many questions focused on bioenergy – a potential life-line in BC with electric power sales from waste wood, and a seemingly limitless horizon in Brazil with its fuel crop potential extending from sugar beet to forests.

On the previous day, the 2007 ForestLeadership Conference was held in the same hotel. It featured presentations on the confr
ontation between the ENGO ForestEthics, and a company called Limited Brands, owners of the Victoria’s Secrets catalog business. In a highly focused publicity blitz using New York Times ads featuring models with chain saws, the catalog company had been accused of threatening Mountain Caribou by using paper made from ‘endangered forests’ in Alberta. Tom Katzenmayer, Limited Brands Senior VP explained how the company changed from being a target to being an advocate for ForestEthics to protect the brand reputation of Victoria’s Secrets, which earns $1 billion/y profit. They now insist on 10% post consumer waste, and 10% FSC forest content in their catalog paper. They suggest that other paper buyers follow suite. Tzeporah Berman, Strategic Director of ForestEthics argued that a declining herd of Mountain Caribou is the ‘canary in the coal mine’ and that much of Canada’s boreal forest should be off limits for forestry. Hamish Kimmins, a well-known UBC Ecology professor, questioned the definition of the terms Ancient Forest, and Endangered Forest which are now being used to frame the issues. At least these very contentious and emotive topics are now being detailed within the conference, rather than outside as street demonstrations, as in past years.

Andy Garner, Principal of Andrew Garner and Associates, specializes in research planning, corrosion, materials engineering for the Forest Sector. He can be reached at andygarner@telus.net.