Research & Innovation
Saving the Canadian Industry: Discussing Possible Solutions
"FORGET PLATITUDES," stated Paul Stuart point-blank, starting the conversation with a powerful directive to the leaders of the industry. "We have to get off our tailbones and do something."...
January 1, 2005 By Pulp & Paper Canada
“FORGET PLATITUDES,” stated Paul Stuart point-blank, starting the conversation with a powerful directive to the leaders of the industry. “We have to get off our tailbones and do something.”
Bob Eamer agreed that the faltering industry needed to make some difficult decisions. “Especially with the recent rise of the Canadian dollar,” he said. “It is accelerating the inevitable. However, one of the only blessings of the high Canadian dollar is that at least other possibilities are being looked at.”
Both men agreed that global conditions and the economy as it was now had a huge impact on the industry they both strongly supported. The state of the mills in Canada needed to be improved to bring them up to international standards. They felt that this was no time to be passive. It was necessary to actively seek solutions to improve the situation and work up a strategy that would open up more opportunities for pulp and paper companies and individual mills.
Stuart admitted that the seeming acceptance of the current situation made him angry. “Everyone knows this stuff,” he said, “and no one is doing anything about it. We need to recognize where we are and what we can do.”
Stuart and Eamer suggested identifying some of the existing strengths. Canada has a stable government and economy, large forest coverage, access to large amounts of annual fibres, huge expanses of unused farmland, a well-established (but unprofitable) recycling system, cheaper energy than many competing nations (that can become even less expensive with government cooperation and partnership), a knowledgeable workforce with proud traditions, state-of-the-art environmental systems, and access to a huge export market next door.
Weaknesses include uninterested and uncoordinated governments who underestimate the potential impact on a large portion of one million working Canadians, a continuing lack of meaningful forest yield development, fibre shortages, ageing mills with small production rates, challenges related to access to fibre, increasing and over-reliance on a single world market (which every new and low cost developing world entrant is also targeting), a taxation structure that makes investment in our mills less attractive than in other countries, expensive labour, and (recently) a strengthening Canadian dollar that has dropped export sales revenues by $100+/tonne.
“With a renewable natural resource,” said Eamer, “it doesn’t make sense to let the industry slide off the global radar screen. You can’t pretend to be an international player by raising taxes and providing no incentives. It doesn’t make sense to destroy the industry.” He added, “It’s easy to come across as alarmist but we have to decide what to do. Just tweaking is not going to make it.”
“The hero for the industry today is the one who is drastically cutting costs,” said Stuart, explaining that although the industry needed to become as lean and efficient as possible, cutting costs without giving a thought to future development severely limited prospective possibilities. Companies, he said, had cut their support of R&D as well as lobbying organizations that fought for their interests. Coupled with the recent rise in the Canadian dollar, protectionist activity by the biggest export market, and the corporate tax structure — the Canadian pulp and paper industry has a steep hill to climb.
“Who steps outside the box?” asked Eamer.
A good example of strategic planning is Agenda 2020, the pulp and paper initiative in the United States. An analysis of the situation of the industry at the time was made through which needs and potential solutions were assessed. The development of the recovery boiler was one of the priorities on which the U.S. industry has been undertaking to commercialize — it has the potential to revolutionize the industry. “That, along with a concerted effort to increase the yields and growth rates of commercial forests are the kind of initiatives that are needed,” said Stuart. “We need to look 20 years from now. We need to change the paradigm. We need to do this in Canada.”
“Politically,” he added, “we have to work on our government, but the ball is now in our court — the Canadian industry, collectively and/or individually, has to define and bring forward specific viable plans .”
“There is a sense of urgency,” said Eamer. “We are so reliant on the U.S. market but they are facing the same financial crisis for their pulp and paper industry and in all probability will become more protectionist.” There was the additional competition from the low cost labour of Mexico which will add to the undoing of the Canadian-U.S. market.
Stuart suggested gathering good ideas from around the world and put them into a Canadian context. However, despite the forestry and industry roundtable of six years ago from which many recommendations were accepted but not implemented, the government has moved away and is more interested in pursuing investment in technology in other fields without realizing that state-of-the-art technology is applicable to this industry.
The government will need to put covenants in place and encourage long-term energy capital spending. For a recognized investment towards revitalization goals, the government can give accelerated depreciation.
Both experts agreed that there were three steps to follow. “Not any one of these three things but all of the three,” stressed Stuart. These steps, agreed on by both Eamer and Stuart, included:
1. GO FOR SURVIVAL IN COMMODITIES, OR MAKE THE MOST OF OUR EXISTING INDUSTRY: This is the clearest strategy, and almost all pulp and paper companies seek to become among the most cost-effective producers of their paper product — and for most grades and facilities, the target must be to reduce delivered product costs by >$100/tonne. At the mill level, this concerns focusing on incremental production increases by de-bottlenecking existing processes at minimum capital cost, incremental operating cost reductions through process and energy efficiencies, and producing less off-specification product by advanced process control, and drastically reducing supply chain and total overhead costs. Especially for smaller Canadian mills, this also implies selling paper to a more local marketplace. At the corporate level, this means merging and acquiring, ensuring good return on capital employed (ROCE) for the stock market, and developing tools and systems to optimize the overall supply chain. Applying this strategy alone is not enough. Alone, it is a strategy to be the last operating mill in your market — the one that eventually turns-off the lights and locks the door behind you.
2. BUY/BUILD ELSEWHERE IN EMERGING MARKETS, OR MAKE THE MOST OF CANADA’S PULP AND PAPER COMPETENCY ELSEWHERE: While some products have very low and even negative growth in North America and Europe, this is not true around the world where in emerging markets, demand for paper is expected to grow at over rates more than double those in North America. Investing in emerging markets is an expensive and complex strategy which requires a sustained investment over the longer term. However our companies can’t beat markets like those in China and South America, so they might as well join them. And the benefits can be significant, especially if this is done by synergizing the benefits from a world-wide network of assets through supply chain management, currency management, etc. Many complexities have to be managed such as the stability of governments and partnering companies, product synergies, etc. This is the major thrust of all large and even some smaller companies as globalization of the industry continues. Many companies will be at least somewhat successful and continue to survive, but unless we learn how to dramatically reduce costs, the losers will be the Canadian economy and the million workers who presently owe their jobs to the forest industry, because the owners will move their priorities to lo
wer cost facilities in or near the growth markets.
3. DIVERSIFY CORE BUSINESS WITH MARKETING & TECHNOLOGICAL PARTNERS AND MAKE THE MOST OF OUR EXISTING VALUE CHAIN BY MIGRATION TO NEW BUSINESS PARADIGMS: Many pulp and paper companies have well-integrated operations from the woodlands to the printer. With the ratification of the Kyoto Protocol in Canada and many other countries, including Russia, there is perhaps a hidden opportunity if the industry and governments respond proactively and aggressively. How does the industry maximize the carbon value chain by increasing the production of green power, use pulp and paper waste or liquor as feedstock for bio-ethanol production, have a surplus of lignin through energy efficiency and make chemicals or energy with this, etc.? How does the industry return to product diversity to capture the best value of a tree, the contents of a recycle box, or the multitude of annual fibres available? Once the art of the possible has been defined, the challenge will then be to effectively forward integrate to the consumer level.
“You have to sell the visions to government so that they can support it,” said Eamer. “We are walking away from opportunities.” He pointed out that Canada is less in the equation that it was 15 years ago and yet there is still so much potential. There were already processes out there that can be developed, although enormous investment would be needed. But, like with the development and subsequent success of microchip technology, it would be a winning situation. “We can still be leaders in the world,” he stated. “Some of the companies out there do have a desire for innovation. Weyerhaeuser is a real survivor. Then there’s Irving, Kruger, Cascades and Tembec.”
“Tembec had maximized the carbon value of tree through their research,” added Stuart. “It’s the best investment.”
Obviously encouragement in the form of government participation was important.
“We have not been partners with our government,” said Eamer, contrasting the Canadian system with the Finnish government which had an organized initiative for the long-term improvement of the national industry within their own country that was working well. “They are now outsourcing both their product and their expertise.”
Diversifying into energy and farming
“The Finns were looking over their shoulder and they could see the value chain,” said Stuart. “Yet we can’t get agreement on anything here. There are so many industries in Canada and they are so diversified. Look at energy: there’s hydro in Quebec and British Columbia, nuclear power in Ontario and oil in Alberta. Defining a winning approach to Kyoto that meets all industry sector and geographical specifics is far from obvious.”
“Most Scandinavian mills have cogeneration,” said Eamer. “The mills produce more power than they use, so they sell it profitably to the grids.” In the United States, some of the states even made deals with the pulp and paper companies about the use of the extra power produced.
In Canada, the cost of the energy is finally being taken more into account as the development of software enables real-time energy decisions. Two of the companies using this type of energy management were Abitibi-Consolidated in Ontario and Stora Enso in Port Hawkesbury, NS. Other mills shut down or lowered production temporarily to sell off their energy reserves at confirmed energy prices.
In South America and Asia, there were definite savings on the low cost wood and energy, as well as the ‘monster machines’ that were being installed.
“It’s true, we’re not ever going to have the same growing conditions as those other countries,” said Eamer. “But Canada has made almost no gain whatsoever in improving yield, outside of a few specific examples. We have one of the lowest yields per hectare.” He explained that in Canada, trees were originally cut down to create farms but suggested that we should now start looking at trees as an agricultural option for idle farmland. “Finland got into the regeneration business earlier but we have one great fundamental advantage over many other countries.” Eamer paused. “We have space.”
Concrete examples that were mentioned included expanding the mill in Trenton, ON, to get rid of Toronto garbage instead of sending it to Michigan. Ontario hydro could be a partner. This, they thought, would be a natural for kraft mills which already have recovery boilers and some of which already do cogeneration.
Eamer also suggested starting with a revitalization of the energy side, then moving to the chemical. “After all,” he pointed out, “pulping is a chemical business.”
Fibre and liquors can be fermented to make ethanol which, along with its derivatives, are products that should be considered. One of the ideas that was developed before its time was Alcell, developed some 10-15 years ago in Atholville, NB. Such offshoots of the industry will provide alternative employment and a cleaner future even if the mills go down.
Many years ago, said Eamer, in Red Rock, ON, a decision was made to maximize the use of the biomass by pelletizing it to replace natural gases through adapting one of the kilns. It worked “like a charm” but at the time, the price of gas and natural oil was so low that it wasn’t cost-efficient.
Examples like this prove that all that is needed from the pulp and paper companies are operating sites and an acknowledgement of the potential.
“We’d be morphing a mill, not building a brand new mill,” said Stuart. “We identify the opportunity…”
“…and how much money we would need,” continued Eamer. “And if we’re successful, we’re prepared to go further.”
“It has all the bells and whistles of being a winner,” finished Stuart. “We have energy, natural resources. We should take all those opportunities and get started.”
“We also need to attract some of the biggest investors with the deepest pockets,” said Eamer. “We have to give them a reason to invest in Canada.”
It’s necessary to create some attractive strategies. “Make it sexy,” suggested Stuart. “The industry has a lot to gain with only a little bit of effort. Look at what could be best in 20 years and design the model for our country. Then bring in government and get started within five years.”
“It should be a coalition of the willing, not the half-hearted,” stated Eamer. Stuart added emphatically, “We can still save the industry and prosper.”
SOME TOUGH QUESTIONS THAT NEED TO BE ASKED:
WHAT IS THE INDUSTRY ACTUALLY DOING with respect to each of the three suggested strategies?
What are some KEY TECHNOLOGIES that the industry is considering with regard to each strategy?
How critical is a TECHNOLOGICALLY ADVANCED WORKFORCE?
Does the Canadian industry have the RIGHT OVERALL MODEL for conducting long-term research and development?
What KINDS OF RESEARCH should be addressed through industry consortia and Paprican, and what kinds of competitive research should be done by individual companies?
Does the pulp and paper industry have a HIGH TECH CULTURE?
Do companies have a game plan for each of their facilities — what products, what selling prices, and what manufacturing/supply chain strategy that will ASSURE SURVIVAL AND “THRIVAL”?
Have the employees at each mill any clue about the MAGNITUDE OF THE CHANGE in which they must participate for the plan and their mill to survive?
Are governments aware of the POTENTIAL IMPACT of the prevalent demise of the industry in Canada and its ramifications on them? Do they have any clue about how they must become a PARTNER IN THE SOLUTIONS — if not to stem the demise, then in what other sectors they will invest to compensate and create re-employment?
What is the impact of industry GLOBALIZATION on the Canadian pulp and paper industry?
How do we encourage international pulp and paper companies to MODERNIZE their Canadian mills? How do we BEAT A RISING CANADIAN DOLLAR?
Where do ALTERNATIVE FIBRE SOURCES suc
h as recycling, straw or hemp fit into the above?
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