Subcommittee on Canadian Industrial Sectors Committee on April 2nd, 2009

[The Chair, Conservative, Dave Van Kesteren]

Next is Mr. Lake.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

Thank you, Mr. Chair, and thank you to the witnesses for taking the time to be with us today.

I want to start, if I could, in terms of the future. One of the things we've heard from witnesses who have come forward from Industry Canada and from EDC and BDC is this notion of differentiating between structural and cyclical difficulties in industries. The interesting thing about the forestry industry is that it was the one--or one of the few--that was prominently mentioned on both sides. There's a component of difficulty that's structural. In other words, it would still exist even if there weren't a global crisis right now. The cyclical part, of course, is that the global slowdown affects all industries right now.

Maybe you could comment on the portions of the industry where there might be an acknowledgement that there may be some structural difficulty, with demand slowing worldwide simply because the need for certain types of products is going away, and what transition plans there may be in those areas.

Mr. Arsenault, could you start?

[Mark Arsenault]

Sure.

The last four years have actually been a transformation for the whole industry, and arguably a forced transformation. We hear a lot that companies haven't modernized enough or they haven't gone into enough value-added, or they haven't looked at their products and expanded, that pulp mills have been the same over the last 50 years.

I argue the point a little bit. Take New Brunswick, for example. Our pulp mills no longer produce newsprint; they're all in high-grade paper. So they've added value to their business. They're into tissues, the coated papers. They've made the transformation at hundreds of millions of dollars of cost. That has taken place.

I think that structural component is in swing. The sawmills have definitely modernized over the last couple of years. We know we could do more. The challenge is the investment component. It's easy to say we need to do more value-added and we need to get into it, but it's harder when there's no credit available and the investors aren't necessarily taking a key interest.

I believe that will turn around as the markets in Europe and South America change. I think there will be more interest. But those challenges still lie there.

[Mike Lake, Conservative, Edmonton—Mill Woods—Beaumont, AB]

I think in his opening statement Mr. Jeffery, when talking about credit, said there's credit for certain things, but there's a particular issue regarding credit for new investments. It might have been someone else who mentioned it.

I guess the question would be this. If there were credit for new investments--and there's a lot of credit becoming available through steps that we've taken in the budget, through BDC, EDC, the BCAP, several different things--what would those new investments look like right now in the industry?

Anyone can answer, or maybe Mr. Jeffery.

[R.M. Jeffery]

To your earlier question around structural versus cyclical difficulties, this speaks to the very issue you're talking about here. I'll give you an example. After the Kobe earthquake in Japan, which was probably about 50% of the market for the B.C. coast at that time, they changed their building systems there. They went to something called pre-cutters, which, if you can imagine them, I call IKEA homes. They're basically factory-built homes where the components are manufactured in a factory, shipped, trucked out to the site, and assembled there much like you would assemble your IKEA houses. We've had to adapt our product mixes to provide the types of products that those pre-cutters needed. They were different from what a carpenter would use.

That kind of building-systems trend is emerging in the United States now, both in a residential housing application as well as in the non-residential market, and there's a big opportunity for us to supply those kinds of building systems. That requires new types of products--engineered wood products like cross-laminated beams, laminated beams, and those kinds of things.

We need to be doing the research and development and the commercialization of those things in order to be able to capture those markets and those building-system markets. That's a really good example. Japan has done it. The U.S. is following. The industry must also follow with it to ensure it becomes an A supplier to those customers. We need to do that.

But then you get to the credit side. When we're an industry that has averaged a return on capital of about 4%, and the commercial market wants 8% to 12%, it's very difficult to say you should invest in this business case on this new product that's going to take us into the future. I'm going to look at that and say, “Well, you can only get me 4%, from your track record. How are you going to demonstrate to me that I'm going to get my 8% to 12% on something that's risky because it's a new product?” That's the conundrum we face.

Is there much the government can do with respect to that? Not in the actual commercial transaction. We have to be able to build the business case, and we have to be able to go to the banks or to the investment community and say yes, you should fund this. Or we should be profitable enough to be able to fund it out of our retained earnings. If you addressed hosting conditions around tax regimes and our cost of production, and we became more profitable, then we could generate internal money to bring to the table as well. We need to work on that.

As far as the government stepping into commercial lending situations is concerned, I don't think that's a prudent thing to do. We need to be able to make the business case ourselves. Now, as I said, you can play a role in the hosting conditions to help us be more profitable, and you can help us very much in taking the products from the lab to commercial land, as we would call it, especially around the bio-energy piece, these engineered wood pieces, these building systems. That's where the work needs to be done.

We're doing it jointly, cooperatively, and collaboratively. We can do more.

[The Chair, Conservative, Dave Van Kesteren]

Mr. Thibeault.

[Glenn Thibeault, NDP, Sudbury, ON]

Thank you, Mr. Chair.

I will start off with you, Mr. Arsenault. When I was growing up I had many friends from Newfoundland, and black liquor means something completely different to me from what you've explained. So maybe you can give me the Coles Notes version of what black liquor is and how predominant this is in the industry.

[Mark Arsenault]

In essence, black liquor is a residue that's left over after the pulping process. They extract all sorts of chemicals, and it's basically the sludge that comes out at the end of the process.

It is a fuel. There are future applications for it. It's incredible. You can break it down into more chemicals and you can actually do chemical refinery. Europe is really tacking those on to the pulp mills.

So there is an enormous amount of potential that could come out of that product. But in its purest form, you can just burn it. For a long time, pulp mills have been generating their own energy from it. So they will use that to create the steam and that will turn their turbines, which will generate the energy to create the pulp.

Basically any pulp mill that has it coming out the other end is using it in one form or another and they've been doing it for decades.

[Glenn Thibeault, NDP, Sudbury, ON]

If we don't look at the environmental ramifications of what's happening south of the border.... If they're mixing diesel fuel with this and then burning it, and then getting a tax subsidy, what can we do as parliamentarians to make this a level playing field for the Canadian industry?

[Mark Arsenault]

I certainly wouldn't recommend that we offer an equivalent subsidy to do the same thing. I mean, it just doesn't make sense environmentally, and as good stewards we just couldn't support that. But we have to do something to level the playing field, either through trade laws or finding some way of using it more efficiently and providing some form of assistance that will help that take place.

[R.M. Jeffery]

Mr. Thibeault, if I could interject here, I have been talking with the Forest Products Association of Canada about this issue. It is a recently emerging issue.

The thought process we have right now is that the parliamentarians, the government, can approach the U.S. government to start the dialogue on the ramifications of this program, both from a trade aspect and from an environmental aspect.

I don't know that you're going to get very far. What Mr. Arsenault didn't mention is that the stimulus bill that passed just recently in the U.S. has been the thing that triggered the pulp guys to be able to get in on this program. So it is a trade issue.

There are companies on the south side of the border who also understand that this is not a sustainable program. It doesn't fit into the renewable energy focus that we have. So if we can get the Canadian government and the U.S. government and the parts of the industry that are the coalition of the willing to sit down and put this in a context of what it should look like, instead of what it does look like, then you could design programs that work on both sides of the border.

So this thing needs a light. It is so egregious that even shining the light of day on it might get the U.S. administration to say hold on a second, what are we doing here.

But more importantly, we need the collaborative U.S., Canadian, and industry approach to this. I think that's what FPAC is going to do. As Mr. Garneau mentioned earlier, we do need to get on top of this. We need to bring it to you, and we are starting to work on that. I think it is fair to say that we will coalesce across the country on this one.

One thing that doesn't get mentioned is that this prejudices the ground wood producers even more, because they don't create black liquor. So they have no ability whatsoever to access this, even if we were to go to some kind of tit-for-tat--we'll subsidize here if you're going to subsidize there.

As Mr. Arsenault said, we're not trying to match subsidies. It's just a losing game.

[Glenn Thibeault, NDP, Sudbury, ON]

I do want to thank you for that answer, and I appreciate your comments that it is not something we would do because it is just environmentally unfriendly. I appreciate that.

Very quickly, Mr. Jeffery, you talked about hosting conditions and one of them was R and D. Do you feel there is enough support out there financially--maybe from this last budget--to help companies find new markets for value-added products?

[R.M. Jeffery]

Yes. The value-for-wood program and the FPInnovations program are very good programs. As I said earlier, we'd like to see them on a longer basis than two years. It's hard to develop those kinds of programs. They take time, and if you don't know you have consistent funding, that's a problem.

The other piece of the R and D, though, is that these flow-through tax credits, which Mr. Bouchard talked about and which are in this motion, are essential. We don't seem to have gotten it right yet, but it would be nice, for the money that industry does use, to be able to flow that through for future years, carry it forward for future years, or be able to write it off immediately. All our competitors do this, by the way. The Scandinavians do it; the South Americans do it; the Americans do it. We should be looking at better fiscal tools to promote the R and D. So it's a combination of both.

[The Chair, Conservative, Dave Van Kesteren]

Thank you, Mr. Jeffery.

That concludes our session here. We'd like to thank you all for appearing before us and taking the time. You've given us some more excellent, necessary insights for the study we're compiling.

I also would like to mention that Mr. Garneau has asked that there be some possible collective direction or some notice to government about black liquor. I think that's a very valuable suggestion. If that could be done in coordination among your groups, that would be most appreciated if we could get that to the committee.

[Mark Arsenault]

We'll work with FPAC to bring that forward.

[The Chair, Conservative, Dave Van Kesteren]

Excellent.

We do have some committee business. I've allowed it to go over, but we really must take care of this business. We're just going to suspend. We'll take a few minutes for everybody to say goodbye and then we'll go in camera.

Thank you very much.

[Proceedings continue in camera]