Image Via Flickr User Peter Blanchard

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 This decline has been linked to an outdated image of the industry as a low-tech, cyclical employer, environmentally irresponsible, and even mills are viewed as unappealing workplaces.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.

The first step is to recognize that our greatest asset—abundance of natural resources—is our greatest crutch. Paul Lavoie, a marketing wizard at TAXI advertising, sums up the Canadian conundrum: “The abundance of natural resources has made us fat, bureaucratic, complacent, overly cautious, and dull. Need some more money? Chop down some more trees. But what good are they if we keep shipping them abroad? We have trees, Sweden has Ikea. We have water, France has Evian and Perrier. We are the fifth-largest car-builder in the world and yet there is no such thing as a Canadian car.”

So the question is: What are we going to do with all our trees? We have billions of them. Half of Canada is treed, accounting for 10 per cent of the world’s forests. There are 361,000 direct jobs in Canada’s forestry sector according to the NRCAN State of Canada’s Forests 2004-2005 report. The value-added wood product manufacturing sector grew by 53,600 jobs to a total of 185,800 jobs between 1995 and 2004, while the low value-added paper manufacturing sector and logging operations lost 18,100 and 19,700 jobs respectively. Meanwhile, the bulk of Canada’s felled forests are automatically earmarked for low value-added newsprint, pulp or softwood. Canada is the world’s biggest exporter of pulp, accounting for 30 per cent of the entire world export market, which is a pauper’s game, especially with the massive investment going on in Asia right now in forests that are simply growing much faster than Canada’s.

When Willie Sutton was asked why he robbed banks, he famously replied: “Because that’s where the money is.” It’s time for Canada’s forestry industry to take a similar perspective. For too long, Canadians have languished in a sorry state of entrepreneurialism, where we just hew the water and carry the wood to the big boss, who then extracts the lion’s share of value up the rest of the lucrative value chain, right up to the customer. We’re not just a bunch of hicks, right? Our national animal is not a woodchuck that just chucks wood.

Our national animal is a beaver that carves and builds. It’s time to accept that it’s not who controls the customer that matters, but rather who controls the resource and thereby controls the market. The wood is ours. It is here. We can do with it whatever we like, including setting it aside for major value-added enterprises. We are not a third-world country. We have top-rate infrastructure, human capital and stable financial capital through our half-trillion-dollar worth of pension funds.

Three areas in particular meet Willy Sutton’s criteria of going where the money is:

1. Value-Added Forestry Products that are Certified Sustainable:
The bulk of the globe’s major retailers of forest products (Home Depot, Ikea, Lowe’s) have stated public procurement preferences for products that have a chain of custody leading back to sustainably certified forests. Home Depot, however, is afraid even to advertise its Forest Stewardship Coun- cil (FSC) product line, because the supply is not there. That’s where Canada comes in: with the world’s largest area of certified forests in general, and FSC-certified land in particular. Although it only uses a small fraction of Canada’s wood fibre, major Canadian value-added wood products like doors and windows ($2.1b), framing products ($1.5b) and prefabricated buildings ($798m) accounted for $5.2 billion in 2003. This is a little more than 10 per cent of the total forest product pie in Canada and could be ramped up considerably by combining the FSC certification with value-added production to meet the demands of the above behemoth retailers. There is a model for financing this type of manufacturing capacity upgrade that has already proven successful in the meat industry with Maple Leaf Foods and the $85b Ontario Teacher’s Pension Plan (OTPP). OTPP invested capital in Maple Leaf Foods so that it could make more varieties of packaged meats. Both parties are now reaping the returns.

2. Biomass Energy:
Canada’s forestry sector has expertise in, and already meets half of its energy needs through biomass energy. At a recent International Energy Agency (IEA) meeting, the big talk was about what other countries could learn from Canada’s forestry industry with respect to biomass energy. According to Forest Products Association of Canada President, Avrim Lazar, the biomass potential of Canada’s forestry sector is already enough to power the city of Vancouver and it could be sustainably doubled in relatively short order. “Bioenergy [forestry and agriculture crops, biomass residues and wastes] offers cost-effective and sustainable opportunities with the potential to meet 50 per cent of the world’s energy needs,” according to the IEA. Given the Canadian forestry industry’s sought-after know-how for harnessing biomass, there is scope to make money helping other countries and industries tap into it.

3. Cash in on the Carbon Sink Bonanza
Canada’s 1.4-billion-acre Boreal forest is one of the last and largest intact forests left in the world. It is also part of the largest terrestrial carbon storehouse on the planet, significantly greater than the rainforests.
The total carbon stored in the biomass, soil and peatlands of the Canadian boreal forests is estimated at 67 billion tonnes (equivalent to 246 billion tonnes of carbon dioxide), and the value of the net carbon sequestration service provided by trees in the boreal forest is estimated at $1.85 billion a year. The value of the current total carbon stored in Canada’s boreal is estimated at $3.7 trillion. According to a study by the Pembina Insitute, the economic value of the non-market services provided by the boreal region is estimated at $93.2 billion per year. By comparison, the net market value of resource extraction activities is estimated at $37.8 billlion. The Canadian Boreal Initiative, a group that includes members like Suncor and Al-Pac, WWF, and the National Aboriginal Forestry Association, are calling for the strategic assets of the boreal to be preserved, with 50 per cent set aside as protected areas. The Canadian people, through the federal, aboriginal or provincial governments claim ownership of over 90 per cent of Canada’s forests. So the decision is up to them—in other words, us. With a global carbon market there is huge scope to tap
into some of the $1.85 billion cash money, never mind the rest of the value from the non-market services and sustainable resource extraction activities from the other half of the boreal not set aside as protected area.

Canada’s forests need a healthy forestry sector as much as Canada’s forestry sector needs healthy forests. The stakes are high, both economically and culturally. We can stay with a broken model, one that still directly and indirectly employs a million people, and lose slowly. Or, we can chart a new course, a pioneer course that will revitalize the forestry sector and graduate Canada into the 21st century economy. And
the 22nd century...