Failure of North American forest products companies to invest in new equipment and technological advancements has been cited as the critical factor with the industry's long-standing, dismal economic performance. Reversing that trend is considered a key component of any future turnaround of fortunes, experts say.
"The global forest, paper, and packaging products sector continues to be shaped by shifting business and environmental factors, creating opportunities for some regions and challenges for others," says Craig Campbell, a Vancouver-based forest products market-analyst for PricewaterhouseCoopers.
"Mills with the lowest production cost structures are the ones that are best able to manage currency fluctuations and rising costs, allowing them to take advantage of new opportunities and markets."
A vital element in any company driving costs down, he says, is "capital re-investment ratio," meaning the rate at which capital is re-injected into operations based on overall levels of depreciation.
Campbell recently completed a survey for PwC, in which he measured the extent of replacement in 2007 of aging or obsolete assets by global forest products companies. The survey did not flatter the North American industry.
Latin American companies were re-investing at an average rate of 3.08 percent, while the Chinese were at 2.84 percent. The US stood at 1.2 percent. Canada was at the bottom of the list, with a ratio of 0.4 percent.
"We would expect to see more consolidations and closures in regions like North America where there are some smaller, older mills that cannot compete with high-tech, low-cost producers in Latin America," Campbell says.
As for net earnings, by the end of the third quarter of 2008, the global economic malaise was infecting the bottom lines of virtually all PwC-identified "Top 100" firms. US companies were the only ones to show an aggregate profit - $808 million - the lion"s share of that derived from sales of assets.
Canada"s forest and paper industry reported losses of US$529 million, compared with losses of US$173 million during the same period in 2007.
By late 2008 every sector of the global industry was hurting, especially those involved with US new home construction - knee-capped by Wall Street"s sub-prime mortgage industry meltdown.
The pace of new construction and permit issuance for October 2008 showed the lowest levels of any month since the government started keeping track in 1959, according to the US Commerce Department. A Canada Mortgage and Housing Corporation report covering the first ten months of the year noted that total starts were down by 1.6 percent compared with 2007.
Because most Canadian forest products companies depend on the US as primary market for their products, firms north of the border experienced record numbers of mill shutdowns and layoffs.
Canada - the world"s top lumber exporter Ð saw a 22 percent decline in exports during the first seven months of the year. By October the price of lumber futures at the Chicago Mercantile Exchange had dropped to $186.50 per thousand board-feet, the lowest level in 17 years.
All of this and more prompted Avrim Lazar, CEO of the Forest Products Association of Canada, to announce near the end of 2008 that Canada's $80 billion forest industry needed immediate government assistance to ensure credit would not dry up.
Federal investments in research and market development were also urgently required, he said, along with tax cuts for the industry, a liquidity guarantee for companies, and short-term assistance for workers on lay-off.
"Government creates the business conditions," says Lazar. "If government gets it right, we in the industry will be able to compete and keep the jobs in Canada."
Later in December, premier Danny Williams of Newfoundland and Labrador announced the province was expropriating timber, hydro electric, and other natural resource rights from US forestry giant AbitbiBowater, after the company announced it would be closing its near-century-old money-losing pulp and paper mill at Grand Falls-Windsor.
Earlier, the mill's union had rejected the company's final contract offer. The company did plan to sell the Newfoundland and Labrador resource assets before pulling out. Williams' move prompted AbitibiBowater to warn of a possible challenge of any expropriation through the North American Free Trade Agreement (NAFTA). This threatened to re-open the entire NAFTA deal.
Williams cited a 1903 letter from the president of the Anglo-Newfoundland Development Company Ltd., a predecessor to AbitibiBowater, to argue the company's rights were dependent on operating a mill in the province.
British Columbia Ð Canada"s primary forest products province Ð did have a social objective clause written into its 1947 BC Forest Act, requiring any Tree Farm License (TFL) or Pulpwood Agreement (PA) holder to also operate a manufacturing facility.
Those requirements were scrapped in 2003 by Bill 45, the Forest (Revitalization) Amendment Act.
Despite all of the grim economic news about the forest industry, however, there remain some optimists who maintain the future can be good.
"I believe our future can be incredibly bright," says Dr. Ian de la Roche, outgoing president of FPInnovations Ð Canada"s forest industry research institute. "But it's not necessarily going to be bright if we think of it in the traditional way."
FPInnovations, dedicated to the discovery of scientific solutions to improve Canada's forest industry global competitiveness, resulted from a merger between The Forest Engineering Research Institute of Canada (FERIC), Canada's Wood Products Research Institute (Forintek), the Pulp and Paper Research Institute of Canada (PAPRICAN).
These three groups still work individually but all research is coordinated through, and by, a common leadership protocol. FPInnovations operates in partnership with the Canadian Wood Fibre Centre of Natural Resources Canada.
Dr. de la Roche - replaced as president by Pierre Lapointe Ð sees a future in which all sorts of new and exciting products would return the industry to robust health. An essential element of this is research concerns lignin/cellulose, the microscopic bonding agent that connects and holds the cellulose of wood together. It is the essential constituent in creation of a new generation of plastics, says Dr. de la Roche, superior in distinct ways from plastics now manufactured from petroleum-based compounds. The aerospace and auto industries are already acutely aware of this FPInnovations research.
"The only difference between a barrel of oil and a tree is a few million years and some pressure," he says. "Anything you can make out of petroleum and refining you can make out of a tree."
He also says that because of global greenhouse gas problems, research into and the cultivation of trees is now more important than ever. Many more trees, therefore, would provide the solution for polluted air becoming clean air.
On another front, research now conducted by PAPRICAN could revolutionize the packaging industry through development of 'intelligent paper' that is, packaging paper whose colour changes depending on what's inside the package. And if there are pathogens inside or viral contamination, inspectors would realize this instantly without having to touch the item.
On the building side, FPInnovations is involved in research projects including development of super-strong wood and wood/laminate products on the verge of being approved for construction in Canada for buildings of up to six storeys. Then there is 'jumbo plywood,' giant wood panels providing enough additional strength to wood frame structures for them to be built as high as nine storeys.
Learn more at: PricewaterhouseCoopers www.pwc.com
Forest Products Association of Canada www.fpac.ca
AbitibiBowater www.abitibibowater.com
FPInnovations www.fpinnovations.ca
