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Conference Offers Honest Assessment


May 1, 2008
By Pulp & Paper Canada

Vancouver, BC -At the 21st Annual Global Forest and Paper Industry Conference, hosted by PricewaterhouseCoopers May 8, there was no Pollyanna denial among the speakers; for long years the industry has…

Vancouver, BC -At the 21st Annual Global Forest and Paper Industry Conference, hosted by PricewaterhouseCoopers May 8, there was no Pollyanna denial among the speakers; for long years the industry has taken some hard blows, the sawmilling sector especially hit with shut downs, with likely more to come. As PwC partner Craig Campbell warned the delegates: “There will be more cash burned, more blood on the floor over the next year at least.”

The collapse of the U. S. housing market and the eroding greenback, the untimely rise of the Canuck buck, too much volume going out the door for too little, more and more sawmills bleeding out and closing down but still too few to use up the supply and increase prices, and chronic negative EBITDA from Canada’s top lumber producers. While there were a lot of reasons for gloom, the mood was oddly cheerful and expectant.

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As it became apparent over the day-long event that the audience and presenters understand that everything must come to an end -bad times included.

The last few decades have been bad indeed, the last few years awful. For example, when comparing overall industry operating earnings, Campbell harkened back to the record loss of $1 billion posted in 1991. Hang onto your hard hat -2007 will be almost as bad and 2008 will be worse. Don’t expect any sort of a recovery before 2010, said Campbell.

No matter how hard Canadian companies trim costs and payrolls, currency swings and the rise of the loonie have wiped away the hard-won gains in a moment. For instance, the relatively paltry five-percent increase of the Canadian dollar vis–vis the U. S. greenback from 2006 and 2007 drained off $2 billion in revenues with $600 million bled away from British Columbia. Although the increases have allowed companies to reduce their U. S.-dollar debts, Campbell noted “the hit against sales” just keeps on coming.

Meanwhile, the weak U. S. dollar has made that country’s exports more competitive, as does the U. S. and Europe’s focus on producing higher-value products which incur less competition, versus Canada’s traditional output and mindset on commodities such as lumber, newsprint and pulp.

On a brighter note, Campbell pointed out that demand for paper is strengthening, especially in emerging markets. Canada’s wealth of forests and low cost of fibre will bode well. Pulp prices are at their highest level in U. S. dollar terms since the 1995 peak; many expect the U. S. economy will soon resurge, mitigating the greenback’s erosion.

“It’s not all doom and gloom for Canada,” said Campbell. Companies that “manage to weather the storm” will be well positioned to greet the “eventual turnaround expected sometime beyond 2009.”

Ken Shields, CEO of investment firm Raymond James, believes North American softwood producers will be “bumping up against long-term supply constraints” courtesy of the ravages of the mountain pine-beetle, rising export taxes on logs coming out of Russia, limits on domestic harvests and other factors. Demand and supply and despite the fall of N. S. housing starts, lumber prices should rise “quite dramatically” over the next few years.

A brief segue but Russian Timber Group CEO Leo Hambro cheerfully noted that his firm is the biggest forestry company in Russia and yet it controls a mere two percent of that country’s domestic industry. With some 20,000 homegrown outfits out there, Hambro says the place is ripe for consolidations, boasts huge forest reserves and proximity to the burgeoning China markets.

Shields also admonished lumber producers for racing each other to the bottom, upping volume and incurring nonsensical and dangerous losses simply to stay competitive and beat their rivals. As he noted, in 2007 Canada’s top three sawmill companies pumped out and sold 11.6 billion board feet of lumber -and earned negative EBITDA of $500 million.

Russ Taylor, president of International Wood Markets Group noted that housing starts south of the line were roaring along at two million starts a year in 2005 and 2006; in 2008 starts are expected to fall to 700,000 units or less. Taylor said the residential real-estate stagnation could last until 2011.

Do the math, said Shields. At best, North America still faces another two years of gloom. Still, it could be worse. The U. S. economy is fundamentally robust and will recover. As Shields put it: “We have moved back from the edge of the abyss, the greatest credit bubble of all time.” (By the way, she also predicts the Canadian dollar will slip down to its “fair value” of US$0.85 within three years.)

Call him an optimist but Avrim Lazar, CEO and president of Forest Products Association of Canada, says the industry has the legs and means to bound into a very bright future.

The U. S. housing collapse has raised lots of dust, temporarily masking some very sunny fundamentals: the global demand for Canadian forest products can and will only grow.

Pushed along by climate change, increasing demands for food and biofuels, an increasing pressures to husband and preserve the finite rainforests and reduce the world’s carbon footprint, land conflicts in South America and Asia; Lazar said the developing world is fast running out of arable lands. Meanwhile the markets for wood products are growing fast in Asia. Food, wood fibre and fuel are all interlinked in value, said Lazar. Something has to give.

That and grow the industry. If the economists are right, Lazar says world GDP will double in 20 years. To fuel that growth -and still assuage the emerging markets’ “demand for protein” and food without further messing up the planet -will invariably see high-quality, low-carbon- footprint fibre increase in value.

With its huge forests growing on non-agricultural land and good practices, Canada has green aplenty in the bank. Avows Lazar: “There is no better way to mitigate climate change than by sustainable forest management.”

PPC


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