Canada's Forest Industry Reeling from Market, Monetary Shocks

By Tulloch, Paul | CCPA Monitor, April 2008 | Go to article overview
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Canada's Forest Industry Reeling from Market, Monetary Shocks


Tulloch, Paul, CCPA Monitor


INDUSTRY AT A CROSSROADS (PART I):

The Canadian forestry industry, long one of the stalwarts within the Canadian economy, is now at a precarious crossroads. "Crisis" is the term being used by union, business, and political leaders to describe the parlous state of the industry. An estimated 110,000 workers-about 25% of the entire forestry workforce-have been displaced in the past five years. Scores of sawmills, wood fabrication plants, and paper mills have been permanently or temporarily shut down.

The Canadian Forestry Service estimates that, between January '03 and April '07, over 112 mills were closed and another 72 were temporarily idled. Most of these mills were located in smaller forest-dependent communities where over 50% of the workforce derive their main source of income from forestry-related economic activities. This is an industry and group of communities that, since Confederation, have served as one of Canada's economic staples in creating prosperity and wealth for generations of forestry workers. Forestry products have traditionally been the workhorse of the Canadian economy, generating more than $80 billion a year, or 3% of the country's Gross Domestic Product (GDP). Despite the recent massive declines, its products are still currently Canada's third largest export.

A host of factors have combined to cause this crisis. Over the last decade, growing international competition, declining demand for paper products due to the increased use of alternative communication tools such as the Internet, the greater recycling of paper products, and some negative consequences of the prolonged trade dispute with the United States on softwood lumber-all these developments have played leading roles in the forest industry's decline. The resulting reductions in market share and market demand have forced a painful process of continual adjustment over the last five years.

"The lumber deal with the U.S. is certainly one of the biggest problems," says Ken Neumann, Canadian Director of the United Steelworkers of America, which represents thousands of workers in the industry. "It actually encourages companies to export logs and to shift production to the U.S. to get around a punitive 15% border tax. We urgently need government measures that encourage domestic manufacturing and job creation. Governments and companies have let down workers and communities, and this severely impacts the Canadian economy through a loss in wages, an outflow of investment capital, and the loss of tax revenues that pay for quality services to Canadians."

Two recent major events have accelerated the formerly slow decline into an avalanche that has precipitated a major crisis within the industry. The rapid rise of the Canadian dollar and the meltdown in the U.S. housing industry stemming from the sub-prime mortgage debacle have combined to deliver what many experts describe as a devastating one-two punch to the already troubled industry. Instead of trying to minimize falling profit margins, as the goal had been over the earlier declines, most firms are now merely seeking survival for the short run, while contemplating quite dramatic strategic changes for the longer term.

Many of the mill closures to date have been within the small and medium-sized, less integrated business enterprises. The larger multinational companies, although seriously affected, had managed to weather much of the turmoil within the market-that is, up until last year. But when the Canadian dollar surged to its height of $1.10(US) last fall, and now settling in at or above parity with the U.S. dollar, the cost of doing business in Canada has escalated to artificially uncompetitive levels. In just a year, the cost of doing business in Canada for these U.S.-export-dependent companies has soared by 20%, increasing the cost over the past five years by 60%. Such massive cost increases have become intolerable for even the largest multinational pulp and paper corporations.

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