Green Transformation Program funnels $1B into pulp, paper industry

Canada's forestry sector is facing what one industry lobby group has called the worst times in its history, but might be able to find a way out of the crisis by marketing its products as more environmentally responsible than those of its global competitors.

There's a ray of green light visible at the end of the dark tunnel where Canadian forestry product workers, communities and companies have struggled since the business began to implode in 2003.

Under the federal Green Transformation Program, $1 billion will be funnelled into the pulp and paper industry over three years. The money will be made available in grants to companies seeking to make production upgrades that would make their mills less dependent on traditional energy sources.

"By making a smart investment today, we are laying the groundwork for a greener, more secure future for the pulp and paper sector and the people who work in it," said Lisa Raitt, minister of natural resources, in a release.

For Canadian producers, the measure is expected to help ease their significant financial troubles. The Forest Products Association of Canada in January earlier sought assistance, asking for $600 million from the federal government over five years. The association said the funds were needed to help the industry secure international markets, develop new technologies and find non-traditional uses for wood in domestic markets. The federal budget, however, allotted $170 million over two years to be used toward those ends.

The industry since then has continued to stumble. Abitibi Bowater — the eighth-largest publicly traded pulp and paper manufacturer in the world — closed its Grand Falls-Windsor, N.L., mill in February. The company later filed for bankruptcy protection in April. In the same month, thousands of forestry workers congregated in Ottawa, calling on the government to protect workers' pensions and offer mills loan guarantees.

Canadian companies have also decried a U.S. measure, the "black liquor" subsidy, valued at $6 billion to $8 billion. Under the program, American mills that combine diesel fuel with a pulp byproduct can qualify for a biofuel tax credit. Avrim Lazar, of the Forest Products Association of Canada, says the subsidy gives the U.S. an unfair advantage in a tight market. He also notes that 60 per cent of Canada's operations already rely on alternative fuels. In fact, Canadian producers have long hoped the country's high environmental standards would set them apart from their competitors.

"Worldwide population growth, along with competition for resources and raw materials, is causing a scarcity of food, fuel, and other natural resources, which accelerates the rate of deforestation and increases global greenhouse gas emissions," the Forest Products Association of Canada says in a report on its website.

As world demand rises, buyers will want to know that the paper and lumber they use was produced cleanly. They will reject products from illegal loggers, countries that don't control deforestation and tropical plantations using land that could grow food, the report suggests.

Worldwide competition

But, some new competitors from South America and Asia are doing very well, shaking up the international industry to the detriment of traditional forestry product producers from Canada, the United States and western Europe.

These new players have two advantages, says Craig Campbell, a forestry specialist with PricewaterhouseCoopers. They use cheap, fast-growing trees, and they have new, efficient plants with modern technology. They can undercut older producers and jump on opportunities when they arise.

But the Canadian industry is facing more than just new competition:

  • Demand for newsprint, once a staple of Canadian producers, is falling as newspapers shrink.
  • The dollar's rise has made products more expensive for buyers in the key U.S. market.
  • Demand for Canadian lumber is falling as American homebuilders pull back because of the credit crisis.
  • U.S. trade actions have hurt the industry.
  • Local costs for wood and energy are too high.
  • Union critics complain the industry has failed to make the proper investments.

Whatever the cause, the effects are clear. In March 2009, accounting firm PricewaterhouseCoopers found the net earnings of 13 of Canada's largest forestry companies dropped significantly in the fourth quarter of 2008.

"It would seem that many companies in the industry are cleaning up their balance sheets — some to the positive and some to the negative, perhaps writing down investments and assets to their net realizable value," said Campbell in a March release.

"Companies have been bleeding and we expect the pain to continue as long as the economy is spiralling downwards."