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Out Of The RED And Into The BLACK With Black Liquor Subsidies?

The recently announced federal aid package for Canada’s forest products sector comes with a hefty mandate: “to help ensure Canada’s pulp and paper sector is both commercially and environmentally susta…

The recently announced federal aid package for Canada’s forest products sector comes with a hefty mandate: “to help ensure Canada’s pulp and paper sector is both commercially and environmentally sustainable for years to come.” In an industry as volatile as forestry, certainty about the sustainability of anything is difficult to come by. But the $1-billion Pulp and Paper Green Transformation Program prompted a major shift in gears for at least one company, as Tembec forwent plans to idle its Skookumchuck pulp mill in light of the committed capital.

While the inherent potential of the package to assist pulp and paper mills and return them to profitability remains hotly contested, as Tembec’s decision demonstrates, it has already acted as a stimulus. Mercer has also announced it will rework its Green Energy Project for its Castlegar, B. C., mill, in light of promised funding from the program.

“Not only does this [program] demonstrate a commitment to the future of the industry through its support of capital improvements, but it will help mills become more energy-and cost-efficient while making them more competitive and better able to keep pulp and paper jobs in Canada,” says Avrim Lazar, president and CEO of the Forest Products Association of Canada, indicating his organization’s profound approval of the package. “We are very supportive of (this) announcement.”

With an emphasis on environmental sustainability, the package provides a $0.16 per litre credit for black liquor produced by Canadian mills between January 1, 2009, and December 31, 2009. The funds are capped; meaning total payouts to Canadian mills will not run over the $1 billion mark. Possible projects that could be eligible for funding include energy efficiency improvements for recovery boilers and pulp and paper machinery, cogeneration unit upgrades, and machinery that converts forest biomass to ethanol.

The program has several critical stipulations however: the funds must be spent over a three-year period on capital expenditures that improve energy efficiency and environmental performance, and funding is tied to the production of black liquor, an element considered problematic by some.

“While a response to the American black liquor subsidy (see Black liquor subsidies, pg. 10) is welcome news for the Canadian pulp industry, in my opinion, this is not an appropriate response for a number of reasons,” laments Arnie Bercov, president of Pulp, Paper and Woodworkers of Canada Local 8 in Nanaimo, B. C. “[This package] targets only chemical pulp while leaving out the mechanical pulp mills, and it is specific as to what the Canadian mills can do with the money, while the American mills are free to decide how they will spend [theirs].”

Natural Resources Canada estimates 27 mills in Canada will be eligible for the funding.

Analyst Kevin Mason agrees with Bercov’s assessment, saying that while the package will be helpful to producers, it is not on par with the U. S. program, a factor sure to penalize Canadian mills. “It is unfortunate that the Canadian program optically tries to match the U. S. program, but falls short on its application. The Canadian program comes with many strings attached, whereas the U. S. program doesn’t.”

Mason, who is managing director of forest products for Equity Research, acknowledges however, that industry is not prepared to turn up its nose at any bones tossed its way. “No producer is about to look a gift horse in the mouth,” he notes.

Also at issue is the pivotal matter of timing. A recent report by the Globe and Mail noted industry may have to wait until late fall or early 2010 for funds to start moving. The package, partially created to mitigate the negative effects of the US$6-to US$8-billion black liquor subsidies to U. S. pulp producers, will be, according to some, too late in its response. “It [the package] does not provide any immediate relief to Canadian companies to meet immediate cash flow problems,” Bercov says. “To become environmentally sustainable over the long haul requires the ability to survive over the short haul.”

The current economic crisis is squeezing the resources and operating conditions of already cash-starved mills, an environment not conducive to the reception of this particular aid package, he adds. “At almost any other time, the goals of the black liquor rebate program would be extremely laudable but under the unprecedented economic crisis, mills, communities, and workers are facing, a lot of mills may not survive to invest in green technology.”

The news of Fraser Paper’s bankruptcy declaration, the day after the funding announcement, further illustrates the futility of the package, says the Communications, Energy and Paperworkers’ Union, which has been alternatively calling for loan guarantees, job protection, and pension protection measures. “We have been pleading with the government for months,” CEP president Dave Coles says. “Instead of meaningful action, we get empty promises of financial aid, such as the $1-billion Pulp and Paper Green Transformation Program.” Coles also pointed out that Catalyst Paper and Fraser Paper expressed their disdain for the package, chalking it up to, “too little, too late.” Both companies own kraft pulp mills.

While the inner workings of economics ensure the package, on a fundamental level, will prove effective in achieving its goal of helping mills improve their operating conditions, an economist consulted for this story who requested anonymity, says the forestry industry is somewhat of a special case. “Economically, this cannot be construed as a bad decision. Economics is all about making the best allocations from a fixed quantity of resources. Nevertheless, it is the prerogative of our industrial leaders to develop strategies that do not solely draw from Canada’s natural resources, but by shifting to long-term sustainability with an emphasis on economic viability.”

FPAC’s Avrim Lazar argues the program is already doing this, saying it craftily combines commercial and environmental change. “This is smart policy and smart spending,” he notes. “The industry has long recognized and acted on the fact that its future lies in being the greenest supplier of product to the global marketplace. However, continued environmental improvements require large capital investment — something that is not readily available during these difficult economic times. The government’s new Green Transformation Fund provides the industry with the capital it requires today to make the environmental upgrades needed to prepare for the return of markets.”

A lack of capital investment has oft been cited as one of the most significant contributors to the industry’s downfall. Linking access to grants and subsidies with investment is indisputably a tool with which to encourage and secure capital spending. However, as PricewaterhouseCoopers aptly notes, “sharp rises in material, oil and gas, fibre and operating expenses are hamstringing the sector’s ability to both compete and to innovate.” As a result, “for the Canadian forestry industry, financial returns continue to be below the cost of capital.” In short, while the $1-billion Pulp and Paper Green Transformation program may very well prompt investment, there are no guarantees that once the balance sheets are tallied, profits will outweigh costs. PPC