Thank you, Mr. Chairman and committee members. Thank you for having me here.
I should state at the outset that I wear an investment hat. I lead the group at CIBC World Markets, dealing with investments in the forest sector as well as the bioenergy sector. My job is to essentially advise investors where in the world they should put their money in the forest products sectors. It may be Canada; it may be elsewhere.
Having said that, I also work with governments as to where and what they can do to attract investments. Right now I'm working with the Government of New Brunswick, leading a task force to attract investment. As well, I'm working with the Government of Russia.
We're in interesting times here. The changes we're seeing in the global forest products industry, not just the industry but the markets for forest products as well as the public policy in this sector, are arguably the most profound we've seen since the end of the colonial era. They're dramatic. We're truly living in interesting times.
On the one hand, this is not just the importance of non-market goods and services, at least traditionally non-market—and I underscore what my colleague just mentioned—it's also the competition for electronic media and the emergence of new competitors and changes in actually who owns the timberland. These changes are occurring around the world, not just here.
What's interesting is that these changes are occurring at a time when arguably there has been a meaningful degradation or analytical capability to assess this. This is true both in the public sector and the private sector. We're too busy fighting the alligators. Again, this is not just true in Canada. We see it in Russia, in Brazil, and around the world. That's a concern. The fact that you're looking at this, and hopefully in a very thoughtful manner, is very encouraging.
The Canadian industry has been hit by a series of shocks. My colleague John Allan has enumerated them. I won't got through them here. We should recognize that some of these are clearly beyond our control, like the changes in technology on the paper side. We have to shut down newsprint capacity when our consumption has dropped in North America by 30% since the year 2000. That's the reality of the market. If you prop up some of the mills that were least competitive, it means down the road that even your good mills will go down. It doesn't mean we can't play a positive role in helping communities to adjust. We should. But some of these things are beyond our control. We should recognize that.
A key challenge facing this industry over time is the fact that unlike most basic materials, we've actually seen a decrease in the price of wood. The markets are suggesting that it was worth less over time. Notice I used the words “was decreasing”. We're at an interesting inflection point right now. In our view, there are five reasons that are going to cause a long-term rise—I mean 10 to 15 years—in the real price of wood. I'm certainly humbled when I look at beyond that.
I'll quickly mention these five reasons. We bear these in mind because they're shaping the environment for this export-oriented industry.
The first is the growing fibre deficit in Asia. It's dramatic. It's not just China; it's India as well. We can go on about that at length if you're interested.
The second is what's happening in Russia with their log export tax. This country is truly a sleeping giant in this sector. It has forest resources that are bigger than Canada and Brazil combined. They supply 40% of the world's exports of softwood logs, and they're about to stop. They're scheduling up to an 80% tax on the export of logs. This shock will reverberate throughout the global industry.
The third shock is a reduction in the supply of illegal logging. We don't often talk about that in Canada, but to give you a sense, roughly 10% of the world's harvest of logs is estimated to be illegal. Almost by definition, it's unsustainable. When you illegally harvest, you're not going to stick around and plant. This has stopped, to some extent; it hasn't stopped completely, but it is coming down. And we can tell you why. This is maybe one of the reasons we saw the real price of wood come down: they were cutting too much in places like Indonesia, Brazil, China, etc.
The fourth reason is this travesty that's happened in British Columbia with the mountain pine beetle. This has global implications. It's a region that supplies 20% of the U.S.'s lumber, and we're seeing a dramatic fall-down in this over time.
Our sense is that both the quantity and the quality impacts have been understated, both by government and by industry. This will create winners and it will create losers, but we should be aware of its global implications.
The last shock is perhaps the most fundamental, and this is really what we call the convergence of the food, fuel, and fibre markets. By fibre I mean wood. The connection is largely driven by energy.
In what sense do I mean convergence? I mean convergence in the sense that the feedstocks for these three sectors—food, fuel, and fibre—will over time tend to trade on the basis of their energy equivalency. This means you're going to have a floor price and lower-quality wood. I don't mean for your sawlogs. Energy will never be able to outbid a sawmill, but it can outbid other folks.
One of the things we should bear in mind here is that the implications of this convergence—and we can go into the question and answer if you're interested—are that we're going to have to stop thinking inside our traditional silos: agriculture, forestry, energy. They're going to move together. Do I really underline the point made by my colleague who just spoke on the need for coordinated land use planning. Otherwise we will have increasing battlefields. We can talk about that a little bit, but that is going to be one of the issues.
Before we get into that, I just want to make one comment. Why is land kept in forestry? I would argue there are two reasons. One is that governments say there's some good or service that is not captured by the market but that they want preserved. It may be deer. It may be recreation. It may be carbon. So we make that government decision. The second reason land stays under forestry is that it cannot make it in agriculture.
What we're going to see with this convergence, with increasing prices of food, fuel, and fibre, is that in our main competing regions—and this is the good news for us—a lot of land is going to shift out of forestry into food, into biomass. That means to some extent that we may well see this comparative shift we've seen over the last 10 to 15 years, from the northern hemisphere—from countries like Canada—down to the south, reverse itself.
You will continue to have an absolute advantage in growing trees in Brazil. My goodness, we can almost hear those trees grow.
Having said that, the competitive advantage, the comparative advantage, could well shift back to us. I shouldn't say that. I should say the northern hemisphere, because it may not come back to us. We're quite confident it will go to the United States. We think Russia will have a good shot at it. Canada may or may not. One of the aces we can play in that, especially with regard to the Russians, is our ability to sustainably manage it. We want to market that aspect. Again, I echo my colleague who spoke previously. That's an important issue.
One of the messages is that our public forests are going to become more valuable over time, for a host of reasons, not just the market. The value of the tree is going to go up, but also of some of these non-market goods. We should capture that.
Having said that, we can go into some of the implications of this convergence—the analytical implications, the organizational, the policy, and the investment implications—in the question and answer period, because they are worth exploring a little. But let's just get on for a moment and stress that there are no silver bullets as we move on here. If there were—we're smart enough—we would have found them.
We're going to have to have a thoughtful response. The government response here, I may suggest, is first of all to recognize at the start that we're traditionally not very good at picking winners, but that losers are generally pretty good at picking governments.
So we have to be a little bit careful in terms of our ability to out-think the market. What we can do is clearly intervene when the market fails. Carbon is a feature of this sector. It's a real economic good, which is not captured in the market yet. We should see what's going on. We're lagging in this area. It's coming at us. We have to understand that carbon will be priced, and when Washington makes the decision to do that, my sense is that business will insist that Ottawa do it within a nanosecond.
The nature of the game is changing here, though. We have to look at R and D. We have to change the nature of our game. One of the things I would suggest is—this isn't a short-term solution—to look at longer-term commitments to R and D. And it's not just R and D—research and development. It's RD and D—research, development, and deployment. One of the things we find is that given our small size—and believe me, our companies are small on a global scale—our companies lack economies of scale. Where economies of scale are most important in this industry is in things like marketing and R and D.
We can't take the risk, especially on some of these emerging technologies. That's a role for government here to support. I did most of my training at the University of Chicago. I believe in markets. But there's a role for government in that area.
Also, come out and recognize here that when you do your R and D work, you shouldn't dilute your efforts. One of the things I am concerned with is spreading ourselves too thin.
We can talk about the bioenergy, if there are any specific comments, or the low-tech or high-tech responses, but I'll turn it over to the chairman.
Thank you.
