Hewers to Carvers
“A culture is no better than its woods.” — W.H. Auden
Canada’s forests are at a crossroads.“The current model is broken. Fine tuning is not enough—dramatic changes are required...We need the Canadian equivalent of the Manhattan Project for the forest sector to get back in the game.” That was the sober message from Don Roberts, Managing Director of CIBC World Markets, delivered in October to a meeting of Canada’s Council of Forest Ministers.
The Canadian forest products industry, with a few notable exceptions, is not returning the cost of capital. Between 1998 and 2004, the cost of capital was 10 to 13 per cent, while Canadian forestry companies had returns in the 4 to 5 per cent range. Since 2001, Canada’s forestry industry had the worst reinvestment ratio in the world, meaning that capital assets are being depleted. This has an unfortunate parallel with the state of natural capital, in that 80 per cent of Canada’s logging jobs are clear cuts, the vast majority on old growth forests, which are more valuable economically and ecologically than second growth forests.
The softwood dispute with the US that has been going on for the past 170 years has drained over $5 billion from Canadian companies’ coffers over just the past few years, not an insignificant sum when you consider the total net income of the entire forestry sector in 2004 was $1.1 billion.
The Canadian dollar has appreciated substantially leaving low value-added commodities such as the bulk of Canada’s forestry exports at risk of “Dutch Disease.” The negative impact of this could be muchworse if it were not for the big rise in US housing starts hungry for Canadian softwood and the fact that many of Canada’s forestry companies have US-dollar denominated debt.
Energy costs are up, including a recent 30 per cent increase in Ontario. Transportation is more expensive and logs have to be transported ever farther to mills. The forest sector’s workforce is getting over the hill with an average age of 40 years, more than a third of them 45 or older. Put that against a backdrop of a 27 per cent decline in enrolment in undergraduate forestry programs over the last four years. This decline has been linked to an outdated image of the industry as a low-tech, cyclical employer, environmentally irresponsible, and even mills are viewed as unappealing workplaces.
On the environmental side, protected areas and watersheds are all being encroached upon. The Woodland Caribou (the animal on our quarter coin) is endangered and in fast retreat. The Boreal forest in Canada, the largest intact forest in the world, is about to be developed and is already 50 per cent staked out by logging companies. Aboriginals—80 per cent of whom reside in the nation’s boreal or temperate forest— are getting a raw deal and there are lots of unresolved land claims. Last but not least, a climate-change induced Pine Beetle infestation is shaving billions off BC’s forestry holdings and is poised to make the jump to Alberta, where some $90 billion worth of forests could be at risk. BC’s solution has been to increase the annual allowable cut in an effort to cut out the beetle’s sustenance. While this harvesting of “beetle-wood” helps explain why there are a few bright spots of financial performance among BC companies, it poses a problem: What will BC do with the increased harvest capacitywhen the “beetle-wood” has been cleared?
And that brings us to the crux: Canada has excess mill capacity (upon which 300 communities depend for their economies) and too few barriers to exit, which is a clinical way of saying that government too often is sympathetic to the pleas of one-mill towns that beg for handouts when they can no longer make it in the marketplace.
All of this sounds pretty daunting, but there is a way out. It involves a radical change in mindset that goes to the heart of Canada’s untenable wood-chopper, oil-driller mentality.