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Managing A Shrinking Industry

"The Canadian industry has moved from the frying pan into the fire," Kevin Mason says simply. The managing director of forest products for Equity Research predicts more mills will be added to the list...


May 1, 2009
By Pulp & Paper Canada

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“The Canadian industry has moved from the frying pan into the fire,” Kevin Mason says simply. The managing director of forest products for Equity Research predicts more mills will be added to the list of dozens that have already closed before the ‘rut’ is over. “Most major paper grades have entered secular decline and the issue going forward is managing a shrinking industry -and as we’ve seen in newsprint, this is incredibly difficult.”

Relying too heavily on its small cornerstones of success and not addressing the bigger picture has contributed to the industry’s downfall, says Antony Marcil, president and CEO of the Forest Stewardship Council (FSC). “The new housing starts in the U. S. are, and will remain, the dominant factor in the health of the Canadian forest industry. Our greatest strength in regard to that is the high quality of Canadian SPF. Our greatest weakness is our dependence on that market. Our second greatest weakness is lack of investment in our production facilities over the last many decades. That lack of investment has meant lost opportunities in terms of productivity gains not realized and diversification into added-value products not undertaken.”

David McDonald, vice president of research and education for FPInnovations, agrees, noting that Canada’s main strengths lie in its diverse and high quality fibre supply, and other abundant natural resources such as water, minerals, and relatively low-cost energy. “We have extensive infrastructure to collect and process forest biomass and a trained workforce,” he says. “But these attributes are also our weakness. We have focused on optimizing traditional product lines to defend against shrinking markets and international competitors. However, the changes in the past few years have been too great to be offset by incremental improvements.”

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Cautious optimism for biomass

Biomass is often touted as a potential area for capitalization, growth, and rejuvenation for Canada’s forest sector, but here too, industry experts caution against undue optimism. FSC’s Antony Marcil sees opportunity in biomass, but is concerned about stressing the forests. “That competition may mean enhanced economic returns for some but the forests may suffer if too much biomass is removed,” he says. Mason of Equity Research worries the inherent costs associated with biomass may render any economic incentive virtually useless. “Getting previously unused biomass delivered to facilities in a cost-effective manner is a huge hurdle to overcome,” he notes. “Even if the biomass is free, the transportation costs cripple the economics in many cases. There could definitely be competition between biomass and pulp/paper markets for fibre and the development of provincial policies around these issues will be key.”

In addition to strategic policy, FPInnovations’ David Mac- Donald is calling on industry to challenge its own ways of doing business by building partnerships with other industries. He foresees a future industry that produces not only traditional products, but higher value offerings such as lightweight composite materials, bioplastics, biofuels, and biochemicals. “To be successful, the companies in the forest sector will have to partner with those in other industrial sectors: aerospace, automobile, chemical, and pharmaceutical,” he says. “These partnerships will be necessary to understand the market and performance characteristics of these new products and jointly develop processes to make them.”

Public policy: support and a safety net

As the forestry sector tries to ward off currency, competition, and resource challenges, industries and institutions alike are turning to governments for answers. Few would contest that public policy plays a critical role in fostering an environment conducive to healthy competition and a level playing field for forestry. At a very basic level, job and income protection for forestry workers is critical, according to the Forest Products Association of Canada (FPAC). “With our jobs and well-being at stake, the answers are relatively straightforward,” declares Avrim Lazar, president and CEO of FPAC. “Governments can provide a safety net that lessens the pain for displaced workers and prepares them for new jobs. They can also assist community adjustment. This is a role they are embracing and playing well.”

While softening the blow for workers who have lost their forestry sector jobs is one area for governments to address, the development of policy to assist the current industry is equally vital. Here, however, the lines become somewhat blurred. As Lazar emphasizes, the current economic climate has made navigating policy even more difficult. “Governments can also stimulate the economy through spending and macroeconomic policies. While some think more is necessary, the truth is that in these uncharted economic times there are no clear prescriptions.”

While policy in this context is not one-size-fits-all, a definitive area for emphasis includes improving what FPAC considers “hosting” conditions for business. Lazar notes the only viable safeguard against job loss is competitive businesses. “Canada is an exporting nation selling into the global marketplace. If we are competitive, we maintain our standard of living. If we are not, we lose our jobs. There is not enough money in the government’s collective treasuries or policy power in the Ministry of Finance to protect us from the need to be competitive.”

Mason concurs with this view, noting the need for changes to competition rules. “Our industry is shrinking and if the governments think of forest products as a sunset industry, then perception will become reality. Companies and associations need to be vigilant in keeping the pressure on government to consider the state of the industry -it is still a huge employer in Canada, especially in the rural areas. We have to expand our regional focus and think globally.”

Uncertainty about the wider economy translates to Canada’s forestry industry. What the sector will look like in the near future remains unclear, and definitive approaches on goals, directions, and achievable outcomes are equally elusive. However, there is widespread accordance on a need for flexibility, both by industry and governments, to respond to shifting challenges and priorities, in order to position Canada’s forest sector at the forefront of future industry, in whichever form it takes.

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It is tough to shrink your way to prosperity.

Kevin Mason, Equity Research


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