The world's top industry players met at Pricewaterhouse Cooper's 20th Annual Global Forest and Paper Industry Conference held in Vancouver in May to discuss 20 years of change in the forest industry sector. A lagging BC industry, progress in emerging markets, alternative energy and environmental sustainability were the overall themes, indicating challenges and opportunities for BC forest workers, and imminent changes in how the province's forestry leaders do business.

20 Years of Change

Bruce McIntyre hosted the opening panel, in which Mike MacCallum, retired PwC partner and Mike Apsey, retired forest executive, discussed changes in the industry. The mountain pine beetle and climate change mean "all bets are off" in terms of how forestry is done in BC, and that inclusive, far-reaching strategy is needed or new threats will emerge.

Both agreed that "too many silos" made it difficult to address the complexity of issues that exist, and that forestry leaders must come together if the industry is to experience an upswing. MacCallum said industry leaders needed to consider Interior mill closures, pellet and bioenergy conversion at specific mills and fully globalizing the industry if BC is to pull through.

Economic Outlook

The economic outlook panel explored global trends in forest and paper including a lag in the North American market, increased performance in emerging markets and the effects of labour outsourcing.

Craig Campbell, leader of PwC's performance improvement practise for the global forest and paper industry said profits in the BC forest and paper industry have declined over the past two years.

BC's Return on Capital Employed (ROCE), an important indicator of financial health, dropped to -1.8 percent in 2006 from 4.1 percent in 2005, meaning a $500 million loss for the provincial industry. ROCE measures the return that a company is realizing from its capital. Calculated as profit before interest and tax divided by the difference between total assets and current liabilities, the resulting ratio represents the efficiency with which capital is being utilized to generate revenue.

Emerging markets including Brazil, Taiwan, Poland and the United Emirates, were the only players to report a ROCE high enough to be globally competitive, at 12.6 percent. This estimate is actually low for South America and non-Japan Asia, said Campbell, "because of the goldrush in investment that's gone on in these regions in the last ten years," which negatively impacts the ROCE calculation. A look at cash flow shows both regions generating 40 to 50 percent cash on sales versus six to eight percent in Europe and North America.

Stephen D. King, group chief economist for HSBC Bank said emerging markets are having more influence on export and capital investment in traditional markets.

"It used to be that when the US sneezed the rest of the world caught a cold. It seems now that when the US sneezes the rest of the world goes shopping," said King. One of the reasons the US held up in last year's housing crisis was export support from emerging markets, but this growth may be due to multinationals in traditional markets setting up shop in developing countries to take advantage of cheap labour. King says it isn't so, that emerging markets are spending more at home. But the numbers don't add up. Consumer and capital spending increases only account for one and three percent growth, which means something else, like outsourcing, has to be causing the spike in ROCE numbers in emerging markets.

Lumber

BC was a top-earner in 2004 when lumber prices were high; the downside is that because lumber makes up 45 percent of the province's industry, fluctuations in prices and exchange rates render the market volatile. Currently, lumber prices are at their lowest in 25 years, but are expected to improve over the course of the next year.

Net earnings of the world's 100 largest forest and paper companies are up 50 percent in 2006 from 2005, due in part to increased paper prices, but this number is deceiving because it takes into account a number of one-time profit opportunities like duty refunds in Canada equalling $2.5 billion, and International Paper's US$5 billion in revenue from the sale of forest lands.

Pulp

The price of pulp is at its highest since 1995. As the second largest sector in BC, representing 15 percent of the industry, the outlook in this area is positive for now, at least until South American potential is realized over the next year. "It looks like 2007 is the best it s going to get," said Campbell.

Despite it all, Campbell said there is still high potential in BC's industry. "We have the best fibre for softwood pulp and SPF lumber, world-class Interior sawmills, a highly trained and competent labour force, sophisticated infrastructure and a stable government and political climate," he said. "But we also have some significant challenges here in BC, which we must overcome."

Mountain Pine Beetle

The most pressing issue for BC right now is the Interior's mountain pine beetle infestation, which has already killed 550 million cubic meters of the province's merchantable pine volume. "We're talking about seven years of annual harvest that's been killed and that provides 18 billion dollars in output every year," said Campbell.

The epidemic is expected to cost BC an additional 900 million cubic metres over the next four years. "Dozens of sawmills are going to close," he said.

Opportunities for carbon-neutral bio-energy production using the beetle-killed wood and other residual wood may be the province's saving grace, however, requiring a shift in how lumber mills handling the product do business, as it means using a different process than with regular lumber.

Campbell suggested that if BC had chip price security synced with the rapidly dying beetle wood and was able to close down inefficient pulp mills there would be a strong business case for a green-fuelled, world class pulp mill. Such a mill would be at the bottom of the cost curve, said Campbell, cheaper than the South Americans. He said that because there hasn't been significant investment in BC pulp for 15 years, it would take both chip price security and chip security to get CEOs to write billion dollar cheques to support the idea.

Renewable energy is just one step in the direction of environmental sustainability, a key issue in the global industry. Companies are being pushed in the direction of certifying their products with an "environmental pedigree" that tracks how they were harvested, manufactured and processed, meaning possible changes in workers' training and mode of operation.

Overall, the BC forest sector is alive with sustainability opportunities. Experts like Ville Jaakonsalo, senior vice-president of Oy Mets -Botnia and Hannu Ry pp nen, senior executive vice-president of Stora Enso Oyj, both European forest and paper companies, discussed strategic issues and trends focusing mainly on sustainability. BC's high energy consumption, which could mean increased dependence on bio-fuel; abundant raw materials for sustainable forest management; and a low carbon "footprint" presented by wood products as opposed to other materials were noted as factors that BC could exploit in rejuvenating the market while making environmental progress.

The shift toward environmental care is backed in the province by renewable energy initiatives from BC Hydro, the Ministry of Forests and the Ministry of Energy, Mines and Petroleum Resources that aim to meet BC's goal to be energy self-sufficient by 2016, and generate revenue as clean energy providers.

Solutions

The cheapest route for clean energy is saw mill residuals and the most potential lies in the 15 million cubic meters of beetle wood lying on the forest floor, which isn't good for lumber or pulp. Six million cubic meters of useless beetle wood a year are often burned because they're a fire risk, but this could mean a source of energy and the potential shutting down of all beehive burners in the province. BC's cheap hydro currently hinders market incentive to develop new energy as wood biomass energy costs twice the price of electricity, but BC Hydro's subsidy incentive carries hope for new projects.

In Europe, bio-energy is a big initiative driven by strict emission standards. They use a "carrot and stick" approach which has created a much higher energy cost structure and a demand for imported input. The global oversupply of wood pellets has created a "cottage industry" in BC that's gathering momentum as Europeans pay the equivalent of three times the price of coal for BC pellets.

"There's no appetite to keep those pellets in BC because of our low energy structure," said Campbell. "In devising our pricing and subsidy strategy we have to be very careful that we get the right fibre going to the right place at the right price."

Despite a dismal outlook in some areas, it seems BC could make a serious comeback if the right people follow the right channels at the right time, to the right horizon.