Canada's Forest Products Industry

Head Table Guests

Rev. Greg Kerr-Wilson, Holy Family Anglican Church, Heart Lake; OAC Student, Rosedale Heights Secondary School; Rorke Bryn, Dean, Faculty of Forestry, University of Toronto; Marc Daoust, President, James McLaren Industries; Lise Lachapelle, Chairman, Canadian Pulp and Paper Association; Barry Rowland, Partner, Ernst & Young; Marie Ranter, President, Ontario Forest Industries Association; Jacques Lareau, Mayor, Town of Buckingham, Quebec; and David J. McFadden, Partner, Smyth Lyons and a Director, The Empire Club of Canada.

Introduction by George Cooke

Linn Macdonald

Thank you for that kind introduction. As George said, and my grey hair will attest, I've worked in the forest products industry for over 40 years.

As a result, I've come to have a profound respect for the significant role the industry plays in the Canadian economy. At the same time we've made major breakthroughs in achieving an appropriate level of environmental performance and sustainable forest management. And I am especially proud of the economic opportunities we provide for many rural communities throughout Canada. As we look ahead, I am immensely proud of the way the industry has changed, in such a rollup-our-sleeves way to position ourselves for the future.

But there are a couple of things about which I'm not so pleased:

• Our inability to make our point of view known and believed by our many important stakeholders in Canada; and

• The volatile and often unsatisfactory financial results the industry has collectively achieved for its shareholders.

How can you hide an industry with total annual sales of $49 billion, where more than a quarter of a million people go in the front gate to work everyday? How do you make invisible an industry that accounted for over $15 billion in IPOs, mergers and acquisitions in the last three and a half years? How do we hide something that big? Especially since we're trying to do the very opposite?

Today I'd like to tell you about this industry. I want to speak about my favourite topic: the profound benefits that the forest products industry brings to all Canadians and the almost astonishing changes occurring in Canada's forest industry. I have chosen the words "profound" and "astonishing" carefully, so as not to exaggerate the degree of change I am talking about.

I then want to make clear how we can--how we must--maintain those benefits into the future. My hope is that when you leave today, you will share my enthusiasm for these benefits if you simply recall four numbers.

Those numbers are: One million, 350, 90 and 25. One million is the number of Canadian jobs that depend on the forest products industry. Three hundred and fifty is the number of Canadian communities that rely totally on the forest products industry for their prosperity. Ninety is the per cent of Canada's net balance of trade that the forest products industry contributed last year. And finally 25 is the percentage of all manufacturing capital invested in Canada that is spent by the forest products industry.

These are seemingly rather simple, if relatively unknown, facts but critically important when you examine just how closely intertwined the forest products industry is with the Canadian economy and with our society's expectations. These are big numbers, to be sure, but they do mean something for every Canadian.

The federal government in the most recent Throne Speech, has described Canada's priorities and challenges as we move into the twenty-first century. Among the most important of these priorities are:

• Sustainable development, that ties social and environmental progress to economic benefits;

• The need to invest in new technology; • Free trade;

• Economic development of rural communities; • Creating a "knowledgeable" economy.

I'll admit that the forest industry hasn't always met those challenges, but that's only half the story because the industry has undergone a dramatic transformation in order to meet two often competing goals: one, the changing expectations of the public, and two, the fearsomely competitive global marketplace where we do business. That transformation has demanded that we completely re-examine the way we do business from an economic, a social and an environmental perspective. It has not been easy. It has not been error-free. It certainly has not been cheap but it has started and is well underway.

Forty years ago, when I started in this industry, Canada had what appeared to be an almost unlimited capacity to produce wood fibre and absorb the industrial processes needed to convert that fibre to pulp, paper and building materials.

Today we know differently. Now the forests are managed on a sustainable basis and the harvest level is set accordingly. Public forest land in Canada is harvested only after detailed management plans are approved, including plans for regeneration, wildlife management and maintenance of biodiversity. Today, forest planning is no longer an inexact art, but an advanced science done with extraordinary detail and foresight.

The result of this planning is profound. Every year the forest products industry plants about 700 million seedlings and many times that number are nurtured through natural regeneration. I should also point out that roughly half the forested land in Canada will never be used for commercial forest operations and will always remain that way. That includes the 12 per cent that is preserved from harvesting by legislation or public policy, such as, national parks.

Canadians have developed auditable standards of certification for sustainable forest management. Independent auditors can measure our performance against these standards and certify us as an example to the world of how forests should be managed and as an example to the millions of our own citizens who never get the opportunity to see our forests. Anyone anywhere can measure sustainable forest management against those standards. Through the Canadian Standards Association, the Canadian model is leading a global effort to form an international benchmark of sustainable forest management through the ISO standards.

Because these initiatives relate to sustainability, and with so much recent debate about global climate change in the lead up to the December meetings in Kyoto, Japan, I think it's timely to briefly mention our industry's progress. While the forest products industry still remains the largest industrial user of purchased energy, we are moving quickly from non-renewable fossil fuels, such as coal or oil, toward a renewable resource, our own biomass fuel, such as bark and sawdust. This too represents a profound change in a very short time.

It used to be that when lumber was cut, the sawdust, along with the curved slabs trimmed off the logs, were considered worthless. They were normally incinerated in a perpetually smoking beehive burner. Fibre was wasted spectacularly by today's standards.

What are today's standards? Well, today at Noranda Forest's Edmundston, New Brunswick pulp mill a new cogeneration plant has become a profit centre, supplying electricity to the provincial grid. It uses bark, sawmill waste and forest residues as the fuel source, while reducing landfill by almost a million tons a year. An economic and environmental success. As bio-mass replaces fossil fuels in this manner throughout the industry, our industry as a whole has achieved the reduction in the use of fossil fuels by 21 per cent since 1990. That's astounding! It may not be perfection, but it is certainly progress.

And then there's the economic and social contribution. In 1996 there were 252,000 full-time jobs in our industry, with about 5,000 new jobs added that year. What's more, the forest products industry directly and indirectly employs nearly one million Canadians. The industry and its employees paid $9 billion in various forms of taxes last year.

And it's not just the number of jobs that matter but the fact that they're well-paid jobs, safe jobs, and more and more knowledge jobs. The average wage for each employee in the pulp and paper industry last year was over $47,000. By comparison, the average Canadian manufacturing wage is just over $30,000.

Today, many forest industry employees work in enclosed climate-controlled work stations, using touchscreen computer-driven instrumentation or in air-conditioned cabs harvesting trees. These knowledge jobs demand more advanced training. It's common in our industry for employees to receive formal or on-site training for up to two weeks every year. This means 4 per cent of our payrolls are invested in training.

More than 350 northern Canadian communities depend on our industry for quality jobs for their citizens, contributions to their community programmes and tax income to support their community. But again, the changes are happening quickly, as social progress in these communities quickly follows the industry's economic progress. When income levels rise, so do education levels, which lead to increased consumer demands that in turn improve the opportunities for local providers or goods and services.

One million jobs, 350 communities. That clearly makes the forest products industry a major contributor to rural economic development. And we can assure those communities that the products of our industry-lumber, panelboards, paper, pulp--have a very real future, which means their communities have a future. Those products are in growing demand by economies around the world. So communities like Edmundston, New Brunswick; Buckingham, Quebec; Cochrane, Ontario; or Houston, British Columbia are cities and towns with a future too.

Surprisingly, not even the explosion of high-tech communication has diminished the world's affection for paper--or demand for it. Printing and writing papers continue to be the fastest-growing sector of the industry, accounting for almost one-third of the world's production. Each new application of digital imaging brings with it a closely tied market niche for a specialty paper product, as people choose to download and print copies of their favourite photo or graphic representation.

Increasingly, shipping labels are directing our pulp and paper products to destinations throughout the world, including Asia. That segment of the global marketplace has replaced Europe as our second-largest market after only the United States where Canadian lumber is used in 44 per cent of the houses built.

This industry has always been export-driven, with four of every five tons produced and two-thirds of our lumber destined for international markets. Yet despite the fact that 1996 was a tough year for our industry, Canadian forest products producers still contributed 90 per cent of Canada's net positive balance of trade. The forest industry posted exports of $38 billion last year, 15 per cent of Canada's total exports. Net exports of forest products reached $31 billion.

I don't need to convince you that Canada needs a positive trade balance. For every item we want to import, we must export something of equal value. Forest products, made in Canada, are highly competitive in world markets and provide a greater positive net trade balance than auto parts, agriculture and metals combined.

But sometimes the rejoinder we hear is: "Yes sure, but Canada's future economy will be based on technology." Our critics say: "What's beneath our feet is no longer as important as what's between our ears." This is a fallacy. I'd like to make two points.

One, Canada's present economy is underpinned by the forest products industry and we must maintain that foundation as we seek any future changes.

And two, this industry is already one of Canada's largest consumers of technology. In other words, one of Canada's oldest industries is transforming itself by calling upon its newest industries.

There's a simple reason for this: We are in a capital-intensive business. A new mill requires an investment of up to $4 for each dollar of sales it generates. Because of the huge fixed capital involved, our assets are expected to be productive for years. The investment decisions we make today are ones we live with. But we continually upgrade our mills and machinery with the latest technologies. We have to in order to remain competitive.

The fourth number I suggested you may want to recall was 25 per cent. That's because the forest products industry accounts for over 25 per cent of Canadian capital expenditures in the manufacturing sector. Or roughly $5 billion per year. This makes it Canada's largest investor of manufacturing capital--bar none.

As a result, anything that affects our industry will have a significant ripple effect on much more of the Canadian economy. This certainly includes our huge and rising purchases of technology. The money we spend on new technology has spawned a well-developed supply industry in Canada for everything from advanced forest products machinery, computer-assisted controls, operating control simulators and world-renowned consulting engineers. The owners and employees of these companies are exporting their products and knowledge around the world.

The industry uses technology in forest planning, supported by satellites to provide data needed to produce digital maps that clearly delineate species, age groups and inventory. With this eagle's eye view, we can design plans for the best approaches to harvest timber both today and in the future.

In our mills, computerised systems control the weight, thickness, colour, gloss, smoothness and moisture of a continuous roll of paper as it is made at speeds of 60 kilometres per hour.

Optical scanners programmed with current lumber market prices compute maximum value per saw log, triggering adjustments until the optimum cut can be made and only then advancing the log through the saws.

Technological and scientific advancements are actively pursued at a number of academic Chairs funded by industry members.

The industry's core collaborative research centre, Paprican, located in Montreal, is a world leader in developing new technology for pulp and paper production. And other co-operative research organisations, such as Forintek and Feric are devoted to improved building materials and better forest harvesting methods.

In addition, through the Noranda Technology Centre, also located in Montreal, research scientists are creating proprietary new approaches to resolve production and operational challenges.

While these examples, won largely through new technology and new attitudes, are certainly important, some of the greatest gains from technology are being won in the crucial area of treating effluent. And on this topic, only one number counts--zero--because over the last five years, science, technology and a lot of dollars have come together to virtually eliminate dioxins from our mill effluents.

With all these splendid initiatives coming from our industry, why are we still the subject of such energetic invective? I believe we remain a large target because the proof of our change exists so far from where our fiercest critics happen to live. It's parallel, I guess, to the idea that if a tree falls in the woods, does it make any noise? Well, for those who care to listen, this is an industry that's making a lot of the right noises.

Many of you, of course, won't have the opportunity to take a tour of a paper mill, sawmill or forest operation. But it won't be for lack of invitation. The Canadian Pulp and Paper Association has encouraged its member companies to throw open their doors to the public. Hundreds of such tours have been conducted and thousands of people have come away with a better understanding about the way things really work in the woods and the mills.

Those thousands are an advance guard for what recent independent polling has confirmed--the public believes the industry is both willing and able to change for the better. More and more, Canadians see the industry as modern and scientifically and technically advanced. I believe they are right. So maybe we are making progress in one of the areas I said I wasn't so pleased with. We are starting to tell our story more effectively.

The other area we need to work on is how we will perform in the future. We, the members of the industry, need to do some things and we also need some help.

One of the fundamental characteristics of our industry is its ability to regenerate the raw materials we depend on. In this way, we are a unique industry. Our products are recyclable and reusable and the fibre we use is regenerated by nature through sunlight. This provides us with a singular opportunity to be truly sustainable, but also to grow. And yet despite this and despite the industry's huge positive economic and social contribution to the nation, we are being challenged as never before, both internationally and here at home.

We are facing four problems:

• First, we are continually facing curbs on forest access;

• Second, we constantly run up against unproductive regulations based on detailed requirements and restrictive legislation which is often based on suspect science;

• Third, there is pressure to subsidise uncompetitive or uneconomic operations;

• Lastly, we face non-tariff trade restrictions that potentially inhibit global competitiveness.

All of these issues put potential limits on our future. Let me modestly suggest that we need to broaden the recognition of how the industry is growing and meeting the expectations of both the government and the people of Canada.

The fortunes of this industry are unusually affected by public policies.

First, we need recognition that sufficient and significant forest lands have already been set aside and protected. Our industry must be able to access and manage the remaining commercial forests in order to be as productive as possible in the globally competitive marketplace, and to grow.

We are managing the forest resource, mostly on public lands. But we fully expect to be judged on the basis of our results. We respect that. We need regulations with clear expectations of results rather than ones that try to stipulate every step of the process. Let us find the most efficient solutions. The industry is in compliance with environmental regulations but please ensure that any future regulations are clearly based on sound science and are economically achievable.

Our markets are global and our competition is global. While we have a unique resource, one thing we must never forget is that nothing we make cannot be made elsewhere. We must remove the trade barriers wherever they occur. Fortunately, Canada has generally had its access to export markets increased through the implementation of NAFTA and the World Trade Organization agreements. The restrictions imposed by the softwood lumber quotas are the exception.

Our industry believes existing international trade rules support the ability of countries to protect their domestic environment. However, we must not accept some countries' approaches to misuse their environment law-making capacity to restrict imports from Canada.

Our industry has been a long-standing supporter for global free trade, and we must be free to compete. What is the case for such freedom?

Again, it's quite simple. The forest products industry, like so many others, is consolidating into fewer, larger players. Canada's largest forest products company is now only the twenty-first--largest on the world scene.

Larger companies can manage industry cycles better and provide improved returns to shareholders with less volatility. These cycles are not really driven by fluctuations in demand, but rather by surges of new capacity arising as the fragmented industry rushes to add production capacity with several companies building or expanding at once. Each surge effectively lowers unit productivity in the collective industry. And this, in turn, adversely affects profitability and shareholder returns.

The industry is marching steadily--and some would say relentlessly--towards this consolidation. In Canada, in the first six months of this year alone, some 15 mergers or acquisition transactions valued at almost $6 billion have been announced. A recent Ernst & Young report described the pressure to consolidate: "Shareholders faced with inadequate returns will continue to pressure companies to restructure operations, sell non-core assets, and court mergers and acquisitions."

Consolidation allows companies to increase their market share, secure fibre supply and timber-harvesting rights, obtain more attractive financing and lower their production, selling and administrative costs. Only the larger companies can afford the stakes in this global competition on commodity products while smaller companies must move to specialty products, as buyers and sellers alike strive to increase shareholder value.

There is an answer. Consolidation and restructuring will occur. I believe--as do many of my colleagues in the industry--that governments must help Canada's industry clear the way. They can do this by allowing the related transfers of forest management and timber harvesting rights on public lands, in order to support the growth of Canadian companies into global-scale competitors. They must also accept the need for restructuring and revitalisation of uneconomic operations, rather than preserving them at any cost.

The industry must maintain the market momentum we've defended and fortified with staggering levels of capital investment and we must improve our returns to shareholders. We must grow. Clearly, the forest products industry remains a major player in the growth of the Canadian economy and a major contributor towards meeting government and social expectations--especially so in northern communities, places far from the comforts here at the Royal York Hotel.

The industry's investments in the environment, in new technology and in people are investments in Canada on a scale unequalled by any other single industry this decade. Indeed, they are unprecedented. Canada's forest industry has been changing rapidly and decisively, albeit to the majority of Canadians, invisibly as well. We have reached a point where, with the increasing application of advanced technology, many of our mills are highly productive, globally competitive, and world leaders in sustainable management of the forest resource.

Today and tomorrow, the forest industry is indeed integral to Canada's future. One million people, 350 communities, 90 per cent of Canada's trade balance and 25 per cent of all capital investment provide the proof. Thank you very much.

The appreciation of the meeting was expressed by David J. McFadden, Partner, Smyth Lyons and a Director, The Empire Club of Canada.