THE MELTDOWN that swept through the world’s financial markets in late 2008 was simply the latest setback to hit the beleaguered Canadian forestry industry.
Its economic fortunes have always followed cyclical patterns, but a series of negative trends over the past decade have collided, creating unprecedented challenges to the viability of individual mills, entire companies and the forestry industry as a whole. Ironically, however, Canada’s most distressed sector is particularly well-positioned to take advantage of tomorrow’s global economic conditions. First, the bad news. Manufacturing costs have been rising in Canada at a rate that has typically outpaced increases in other countries. The Canadian dollar’s appreciation has exacerbated the situation given that the industry exports 60 per cent of its production. The past decade has also seen a significant increase in production capacity in other countries, where lower costs and faster growth rates translate into a competitive advantage. Moreover, these factors were all in play before the dramatic collapse of global financial markets and the virtual halt of new housing construction in the US. The cumulative impact of these trends has been staggering. More than 200 Canadian mills have either shut down or been idled, while estimates put the sector’s job losses in the last two years at approximately 50,000, roughly 20 per cent of its workforce. A report on the state of the global forestry industry recently issued by PricewaterhouseCoopers says that Canada’s forest, paper and packaging sector was the world’s worst performer in 2008, accounting for roughly half the combined $8-billion (US) in record losses posted globally by the top 100 firms in the sector. In view of these trends, one might be tempted to conclude that forestry is a sunset industry in Canada. But before jumping to that grim conclusion, let’s consider a few important factors that are likely to affect the forestry industry, to see if there is a glimmer of light filtering through those magnificent old trees.
1. Demand for traditional forest products. Canada is the leading global supplier of newsprint, a product in steady decline given the ongoing growth of digital media. Demand for newsprint in the US, Canada’s largest export market, dropped by a whopping 40 per cent between 2000 and 2009. But other factors, such as population growth and increasing standards of living in developing countries, may partially offset this fall. The growing market preference for wood products, which in many cases produce fewer greenhouse gas emissions than other carbon-intensive materials such as steel, cement or plastic, offers another opportunity for Canadian producers to find alternative markets.
2. Bioproducts. The global demand for biofuels derived from logging residues and manufacturing waste – considered by some as an environmentally preferable alternative to agricultural biofuels – will continue to grow. Biofuel plantations, though more contentious, are expected to become economically viable in certain markets. Research into “next generation” bioproducts, such as food-grade acetic acid and products that incorporate nanocrystalline cellulose (the primary structural building block of trees) offer the Canadian industry significant new markets.
3. Transportation costs. As a result of global measures to address climate change, transportation costs are sure to rise. This increase will benefit Canadian companies that export to the US relative to their more distant foreign competitors. But it also presents challenges, since Canada will be disadvantaged when it comes to supplying more distant industrializing nations.
4. Public and consumer environmental expectations. Demand for Forest Stewardship Council (FSC)-certified forest products has stimulated significant improvements in forest management, and the global trend toward environmental accountability shows no sign of levelling off any time soon. Canada faces particular challenges in this regard, in light of growing expectations that it take steps to preserve the unique ecological characteristics of its remaining intact forests. Nevertheless, Canada already exerts more robust governance over its forests than do most non-industrialized countries, and boasts 25 per cent of the world’s FSC-certified forests. As a result, Canada is well-placed to consolidate its position in these increasingly demanding markets.
5. Climate change. A warming climate may enhance forest growth and productivity as a result of higher temperatures, longer growing seasons, expanded forest range and the fertilization effects of elevated levels of carbon dioxide. But these factors will likely be outweighed by negative impacts, such as increased frequency and severity of drought, fires, insects and storm damage, and general stresses to forest ecosystems that are outside of their optimal climatic range. Canadian forests have been especially hard-hit, having experienced the double whammy of severe fires and, in BC and Alberta, the far-more devastating effects of the mountain pine beetle. The sheer vastness of Canada’s forests, however, helps to insulate the forest industry from the full impacts of climate change. As a result, producers in Canada are less vulnerable than their competitors in countries that practice more intensive forestry in smaller areas.
These five trends are not the only factors that are affecting Canada’s forestry industry. We have not considered the impacts of trade measures such as the Canada-US Softwood Lumber Agreement, for example. Although they present a mixed picture, these trends provide a basis from which to speculate about the sector’s future direction and viability. Considered together, they suggest that rumours of the forest industry’s demise in Canada are exaggerated. The world will continue to need forest products, and Canada will remain a capable supplier of existing and future markets. Although challenges remain, the nation has the potential to be less disadvantaged than its competitors. But “traditional” wood and paper production is unlikely to return to the peak levels of the recent past, and employment and harvest levels will be similarly diminished. Despite its trials, Canada’s forest sector should resist the temptation of diverting wood fibre to the biofuels market as some hard-hit communities have proposed. According to “Bio-energy and the European Pulp and Paper Industry – an impact assessment,” a 2008 study by McKinsey and Pöyry Forest Industry Consulting, bioenergy generates only one-thirteenth of the employment per volume of wood than does the production of pulp and paper. If the purpose of a new bioenergy industry is to replace lost employment in Northern communities, it will be largely fed on wishful thinking, false promises and bad subsidies. Logging for bioenergy also has the potential to be more environmentally damaging than traditional cutting, since there is greater pressure to utilize tree tops, branches and even roots instead of allowing this litter to remain on site as a source of soil nutrients. It would be better to plan for a modest increase in forest-based bioenergy, and for that increase to come mainly from waste by-product material generated through manufacturing. Canadian forestry companies should plan for a smaller, more agile and greener industry that involves new products and markets. Rather than rely on high-volume, low-value biofuels, the companies could get ahead of the coming wave of sophisticated bioproducts. Research is currently underway to develop applications for new forestry materials, such as cellulose-based nanofibres, in critical applications such as aircraft manufacture. Emerging markets have the potential to yield a significantly higher value per cubic metre of fibre than traditional primary processing industries, and do not depend on having access to vast stores of fibre. Instead, success will require ingenuity and the marketing savvy to develop and exploit new markets before others do, plus the flexibility to move on when those markets become saturated. This would entail different manufacturing facilities than those currently in place, as well as a new corporate culture – one that embraces an admittedly uncertain future instead of continuing to fall back on the traditional (and increasingly obsolete) strengths of the Canadian forestry industry. By focusing on higher-value products, the industry would reduce its footprint in the forest. No longer driven to log the maximum volume of wood, companies could consolidate their managed forests while agreeing to conserve remaining intact forests and other areas with particularly high conservation value. By protecting caribou, wolverine, lake trout and old-growth forests, Canada could pave the way for certification on much of its remaining non-FSC-certified forests, thereby capitalizing on the “green dividend” resulting from having a smaller footprint. This green dividend can be cashed in with the help of the sector’s traditional arch-enemies. Working with shoestring budgets, environmental groups such as ForestEthics and Greenpeace have proven that they can out-PR even the highest-paid marketing and public relations agencies. If Canada’s forestry companies were to partner with their long-time opponents, it would virtually ensure Canada’s status as the world’s preferred supplier of “green” forest products. The biggest challenge to this path is ideological, rather than financial or technological. Shaking off the hewers-of-wood persona of Canada’s forestry sector won’t be easy. Nor will forestry companies and environmental groups quickly become comfortable bedfellows. A smaller, more agile industry, and – especially – a greener one, may not appease all critics, and Canada’s traditional forestry executives may rail at the idea of leading such a charge. But as the saying goes, “If you’re being run out of town, get in front of the crowd and make it look like a parade.”
Martin von Mirbach is an advisor to World Wildlife Fund Canada’s Forests and Climate Change Program.
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