By Robert Forrest
Copyright 1997. Contact publisher for permission to use.

The BC forest industry as a whole had a bad 1996 and can look forward to an even worse 1997, according to the prognosticators at the 10th annual British Columbia Forest Industry Conference held by Price Waterhouse in Vancouver. While some of the reasons for the poor performance were unique to the West Coast industry, some of them are causes for concern in the rest of the country and may be indicators of underlying weakness in the industry across Canada.

The Price Waterhouse conference is an annual event that draws about 450 industry watchers and leaders. What they heard this year was not good. Mike MacCallum, a Price Waterhouse partner and chairman of the company's World Forest Industry Group, laid out a grim picture. The BC forest industry as a whole lost $250 million in 1996 and is projected to lose about $450 million in 1997, according to MacCallum. These red-ink estimates follow on 1995, a year when the industry had earnings of $1.3 billion on sales of $17.7 billion.

What has happened?

Except for the lumber sector and the paper sector, the forest industry lost money. The biggest loser was the pulp sector, which lost an estimated $625 million in 1996. Even plywood and veneer, a perennial money maker, fell victim to rising wood costs in 1996 and only broke even. Newsprint showed a small earnings level of about $25 million. Lumber had 1996 earnings estimated at $475 million.

When MacCallum divided the lumber sector into a coastal and Interior regions, the figures showed that the Coast lost $35 million while the Interior (or rest of the province) had earnings of $510 million. Estimates for 1997 show all sectors but newsprint will be in the red.

Discussing the difference in earnings perbetween the Coast and Interior regions of the province, MacCallum supplied his audience with comparative export figures for the two lumber sectors. While almost 50 per cent of all Coastal wood products go to Japan and only 18 per cent are shipped to the US, more than 70 per cent of Interior wood goes to the US and only 7 per cent to Japan.

The major factor affecting all sectors of the West Coast industry is cost of wood, according to MacCallum and others at the conference. "Logging costs were almost flat until 1993,'' he told his listeners, "when the increased regulation caused them to take off. Since 1992, costs have risen, in (constant) 1996 dollars, by 70 per cent. This has added some $2.2 to $2.5 billion to the industry's costs through increased regulation and stumpage.''

MacCallum went on to point out that industry costs did not increase due to harvesting in remote areas. He points out that increased costs from a 1987 regulatory change were offset by cost efficiencies five years later.

The costs of implementing the Forest Practices Code, higher stumpage and declines in the harvest levels were cited as reasons for the higher wood costs. Two factors have contributed to the lowering of harvest levels: the downsizing of the annual allowable cut to "sustainable'' levels and bureaucratic delays in approval of cutting plans. This latter problem is being corrected, according to the government.

The lumber sector was also adversely affected by lower chip prices resulting from the decline in the price of pulp, which in turn resulted from a global stagnation in demand for and an oversupply of kraft pulp. Low pulp prices are likely to continue as long as overcapacity remains a problem. With more new capacity scheduled to come online in tropical countries, supply will continue to outstrip pulp demand, according to Roger Wright, managing director of Hawkins Wright, London, England. The result will likely be an extended period during which chip prices will not rise significantly. This will adversely affect chip supplier profitability.

To become more competitive, excess capacity will have to be removed from the system, according to John Chrysikopoulos, director of the paper and forest products group of Salomon Brothers, New York. In down markets, that has meant the closure of mills in Eastern Canada. Chrysikopoulos suggested that necessary rationalization of the BC industry would shrink the province's pulp sector significantly. He told the conference that, if there were 10 pulp producers in the province today, in five years there may only be two or three. The implication may well be that, along with unprofitable producers, some unprofitable mills will have to be closed in BC.

Chrysikopoulos also suggested that equity investors were reluctant to invest in BC because the province is seen as politically unfriendly to business.

Bob Findlay, president and CEO of MacMillan Bloedel Ltd. of Vancouver, told the Conference that lack of reinvestment is threatening the BC forest industry. Speaking during a panel discussion of company presidents, Findlay said that the lack of investment resulted from the inability of shareholders in BC companies to earn an acceptable return on their investment.

According to some industry observers, institutional investors are reported to feel companies like MacMillan Bloedel are underperforming. The same institutional investors are credited with forcing Avenor Inc. of Montreal to reshape its offer for Repap Enterprises Inc., also of Montreal, which saw the latter's Repap BC orphaned and forced to seek bankruptcy protection the day before the Price Waterhouse Conference. Wright pointed out that there was no potential relief in higher prices for pulp producers as long as tropical producers can deliver pulp for US$300 per tonne while BC producers face a break-even cost above $450 per tonne.