THE FUTURE OF THE FOREST INDUSTRY (2006 – Revised 2007) The forest industry continues to be an important contributor to the province’s economy. It sells approximately $18 billion of products annually; contributes about $4 billion in government revenue each year and employs more than 200,000 British Columbians.
Under the provincial government’s Forestry Revitalization Plan, significant changes have been made to forest policy to diversify the forest sector, enhance its competitiveness and improve the regulatory environment in which it operates.
Although there are challenges in implementing these policy changes, the provincial government is to be complimented for many of these initiatives.
However, the industry faces very significant challenges that these policy changes alone will not overcome. Among these challenges are the mountain pine beetle devastation in the Interior, working within the framework of the softwood lumber agreement with the United States (SLA), a strengthened Canadian dollar, marginal investment returns and, on the Coast, inadequate capital investment and a changing timber profile with increasing emphasis on second growth and hemlock.
The complexity of the challenges is compounded by the fact that there are distinct forest industries within the province, on a regional as well as a product basis. Regionally, there is a coastal industry and an interior industry – each managing similar, but also very different threats and opportunities to the success of the respective regions. The Interior could be seen as two separate industries divided into a southern industry that has many of the same issues as the coast and a northern industry that is dealing with the mountain pine beetle epidemic. The industry is also divided into important product segments. There is a logging and forest management segment, with many small, non-integrated firms. There is a primary – or sawmilling – industry that breaks down logs into lumber and residual products. This sawmilling sector is the single largest component of the industry’s manufacturing sector. In addition, however, there is a very significant secondary industry, in value-added wood products and in pulp and paper. The pulp and paper industry depends on the primary breakdown industry for most of its fibre supply in the form of chips and the primary industry relies on the pulp and paper sector for important revenue from the purchase of those residual products.
There is no one solution that would help all industry types but it is clear more change is needed to ensure the province’s forest industry can be globally competitive and capable of generating the returns on capital necessary to support reinvestment.
THE INTERIOR
The sawmills in the Interior are some of the lowest cost producers of commodity lumber in the world. The Interior has undergone consolidation in recent years, as well as massive capital investment in upgrading sawmill technologies. This has been required in order to lower unit production costs in the face of lumber duties arising from the softwood lumber dispute with the United States (SLD) that preceded the SLA and to increase the manufacturing efficiencies necessary to effectively saw MPB affected timber. Government’s recent market-based policy changes, combined with new tenure offerings, has encouraged this investment in lumber as well as in other products such as OSB (oriented strand board) and wood pellets.
At this juncture, the unprecedented mountain pine beetle infestation presents the single largest challenge to government, industry and Interior communities.
Therefore, government policy development should focus on the implications of that infestation over the next five to ten years on:
• The vast area of land and volume of timber affected;
• The limited “shelf life” of infested timber for use in traditional lumber products;
• The drop in value of infested timber;
• The significant increase in residual products such as chips and other by-products caused by increased harvest rates and lumber production now occurring; and
• The need for industry and communities to adapt, diversify and stabilize as the increased harvest levels subside and the timber supply declines.
THE CHAMBER RECOMMENDS:
That the provincial government develop policies that:
1.
Maintain Competitiveness of Lumber Sector: policies should facilitate the efficient and economic use of the affected timber through:
a) a continuing effort to streamline regulatory systems and approval processes;
b) further enhance market-driven industry rationalization; and
c) establishment of a stumpage system that is market responsive and recognizes the decline in the value of this timber and the products that can be produced from it; and
2.
Encourage Uses for Residual Products: policies should encourage uses for the increased amounts of residual chips and other by-products that are being generated by increased harvest levels and lumber production, which could include energy generation and alternative wood products as well as ongoing supply for the pulp and paper sector;
3. Encourage Uses for Infested Timber Not Suitable for Lumber: policies should encourage alternative uses of the affected timber as the ability to manufacture lumber from that timber declines;
4. Address Forest Health: policies should address forest fire hazards that will increase to the extent the affected timber cannot be utilized;
5. Encourage and Facilitate New Forest Investment: in light of the increased harvest levels, policies should, through innovative tenure arrangements, as well as through more traditional investment, enable the massive silviculture effort and new forest management initiatives that will be required to generate a new, healthy forest that will be economically viable in the long term;
6. Promote New Opportunities Without Undermining Existing Rights: the foregoing polices should promote new opportunities, uses and investment without undermining existing rights by, in part, encouraging private sector solutions that do not require new rights to be issued by government or, where new rights are issued by government, by avoiding the creation of overlapping tenures on the same land base.
THE COASTAL INDUSTRY
The Coastal Forest Industry, which encompasses the West Coast from Prince Rupert to Southern Vancouver Island, is going through a massive transition as well. On the southern coast, harvesting levels have declined for a number of reasons:
• Delivered log costs have skyrocketed as a result of the legacy of the Forest Practices Code and remains high and the fact that access to much of the available timber is in remote areas;
• Areas of high value accessible timber have been put into Protected Areas and Parks through environmental and aboriginal pressures;
• Global competition and product substitution has radically reduced the market share and profitability of coastal forest products such as softwood pulp and hemlock lumber;
• Low returns on investment have prevented capital reinvestment in old, inefficient manufacturing facilities resulting in widespread closures of sawmills and pulp mills;
• Lack of reinvestment has resulted in high labour costs and lower productivity levels compared with other competing regions;
• Stumpage paid to the Government has not reflected the underlying value of the lower grades of timber;
• A fibre supply that no longer fits the traditional model of creating lumber from old growth stands of timber, and
• Softwood Lumber Accord has restricted market access for coastal lumber to the US.
These are reasons why the coastal industry is not the vibrant business it was 25-30 years ago. While Government has made efforts to invoke policy to resolve some of these issues through its revitalization strategy, the industry continues to languish behind the Interior in generating economic returns sufficient to bring about reinvestment. Harvesting levels continue to drop and sawmills continue to close. The profile of the timber harvest is changing from the traditional source of old growth timber to smaller diameter, second growth forests (similar in size to the Interior). As such, older mills have closed because of the inability to efficiently process the smaller logs, with much of this supply being exported to the United States for processing. This is because the SLD effectively blocked, or severely restricted, market access to the US from any new coastal small log mill. These issues have not disappeared with the SLA.
For the coastal industry to prosper in the future, Government needs to help create a climate that will make the industry competitive in the global marketplace, foster the development of new value-added products, encourage new entrants into the industry and open competitive access to the timber supply. If a new coastal model is to be successful manufacturers/licencess need to look at focusing on new manufacturing technologies and extracting the maximum value, or margin from the timber resource. Government can aid in developing research chairs to foster new product development. At the same time, small business should be encouraged and have the ability to access timber resources to supply large manufacturers and to create small business opportunities. This will enhance employment stability in resource communities and bring about increased economic development.
THE CHAMBER RECOMMENDS:
That the provincial government:
1. Fund a research chair at an appropriate BC institution, specifically to look at alternative ways of creating forest products from hemlock, the predominant species on the coast of British Columbia, including advanced drying methods. The person in this position must be granted the ownership of any technology developed so as to encourage the promotion of successful research into the market;
2. Create incentives for new entrants and existing firms to invest capital in manufacturing facilities aimed at making products from second growth timber. Such incentives would include investment tax credits on plant and equipment purchases, employment incentives, lower municipal taxation, and reduced logging tax rates;
3. Apply similar incentives in the harvesting sector, in an effort to encourage innovation to reduce the high cost of getting fibre/logs to market; and
4. Foster diversification and increased markets for logs through competitive bids and new tenure opportunities. Encourage the extraction of lower value timber from cut blocks through stumpage rates that reflect the market value of lower value timber or other incentives to fully utilize the coastal timber profile.
Province-wide In addition to these region specific issues and recommendations, there are actions the provincial government can take on matters having province-wide application, including the following:
FORESTRY REVITALIZATION TIMBER, INCLUDING BC TIMBER SALES (BCTS) With the implementation of the Government’s Forestry Revitalization Act, about 20% of the allowable annual cut held by major licences was taken back for redistribution to First Nations, community forests and the competitive timber sales program under BCTS.
As BCTS and the new First Nations and community licensees have not been accustomed to operating programs to develop and harvest this amount of timber, there have been difficulties accessing timber that was available in the past.
Together with previous allotted volumes, BCTS is now responsible for about 20% of the Crown timber in BC. This represents a major source of work for timber harvesters and a major source of fibre supply for manufacturing facilities. In addition, with the government implementing market-based pricing for stumpage, bids on BCTS timber influence the stumpage that is paid on much of the rest of the provincial timber harvest. It is, therefore, essential that the BCTS program operate on a commercial basis. Rather than acting as a regulator or policy maker, its focus should be the needs of the market for wood. In this role it should not be influenced by issues related to impacts on government revenue. That is the legitimate role of the government and the Ministry of Forests and Ranges, as its regulatory and policy arm, not an organization with a mandate to get wood into the marketplace. Yet, currently, BCTS comes under the jurisdiction of the Ministry of Forests and, therefore, is subject to the bureaucratic constraints imposed by government objectives and goals.
For BCTS, and those depending on it to make available wood in the marketplace, to succeed it must have a mandate that requires clear performance and accountability measures, cost control and the flexibility to pursue a business-like vision.
THE CHAMBER RECOMMENDS:
That the provincial government:
1. assist new tenure holders such as First Nations and communities, to facilitate development and harvesting of their tenures;
2. investigate converting the BC Timber Sales Program into a Crown Corporation with its own clear, commercially focused vision, mandate and accountability to develop the fibre-basket it controls; and
3. pending conversion of BCTS to an enterprise, enable or require it to offer timber sale licences for bid at variable rate stumpage, and to provide sufficient volumes to generate on an ongoing basis the necessary wood supply to foster forest product opportunities.
FIRST NATIONS In addition to being new tenure holders, First Nations are involved in the development and harvesting of other tenures as a result of their aboriginal rights and the related duty of government to consult and, in appropriate circumstances, accommodate First Nations. The timely fulfillment of this duty is integral to efficient forest operations on these other tenures, and it is also necessary for First Nations to have a greater hand in being part of the industry. The provincial government and First Nations have made significant efforts to enter into agreements that improve the consultation and accommodation process. However, not all First Nations have entered into these agreements, and more recent versions of these agreements seem to be less beneficial to ensuring an efficient process. These barriers need to be overcome if the industry is to succeed.
THE CHAMBER RECOMMENDS:
That the provincial government continue efforts to ensure that all First Nations have these agreements in place, where applicable, and that the agreements do facilitate more efficient consultation and accommodation process.
OTHER The provincial government can also enhance industry competitiveness through policies that extend beyond the timber resource, including policies that affect the availability of skilled workers, the development of new products and forest industries, the viability of existing manufacturing facilities and the demand for BC forest products, domestically and internationally.
In many communities in the province, a significant source of local government revenue are forest products facilities. As local government costs increase, the tax burden on these facilities can make them non-competitive. This serves neither the needs of the community nor the facility. Although the provincial government does not directly control local government taxes, it can play a role in the overall revenue available to local government.
In market development, the two senior levels of government and the forest industry have significant programs, but they are not as well co-ordinated as they could be. Domestically, all three levels of government, together with industry, have promoted the use of wood in important projects, ranging from Richmond City Hall to the University of Northern British Columbia to the 2010 Olympic Games venues. It is important that new projects continually be added to this list.
The Canada/softwood lumber dispute is one of the more obvious examples of trade barriers against BC forest products, but these barriers come in many forms, including unfavourable building and fire codes. As these barriers are erected by governments, the provincial and federal governments have significant roles to play if fighting them. Although the new SLA has resolved the lumber dispute, the issue now becomes one of ensuring it does not have unjustified adverse implications on BC’s forest industry.
THE CHAMBER RECOMMENDS:
That the provincial government:
1. encourage innovative secondary forest products industries such as bioenergy and engineered wood products through commercially based arrangements with primary producers and timber harvesters;
2. enhance the competitiveness of all forest products manufacturing facilities through improved taxation and revenue sharing arrangements at all levels of government;
3. promote labour force and skills training applicable to the forest industry;
4. enhance the competitiveness of secondary industries through training targeted at the value-added industries in business and financial planning and similar skills for entrepreneurs;
5. continue market development and market access policies in co-operation with the federal government and the forest industry, and improve co-ordination of market development programs among these three key players to maximize the value of investment in these programs and encourage the use of BC forest products in the province, in Canada and in international markets; and
6. continue to work co-operatively with industry and the federal government to address tariff and non-tariff trade barriers against BC forest products and, in particular, monitor the effects of the SLA and act expeditiously where problems arise in its application.
