Industry Committee on June 15th, 2006

[The Chair, Conservative, James Rajotte]

Good morning, everyone. I think it's 10:02 a.m., so we're starting close to time.

I want to thank witnesses and members for coming in an hour early. We are discussing recommendations or observations after this two-hour meeting, so we ask members to stay after 12 noon.

We have with us this morning three witnesses. From the Forest Products Association of Canada we have two individuals, Marta Morgan, vice-president, trade and competitiveness; and Tom Rosser, the chief economist. From the Canadian Wood Council we have Shawn Dolan, director of corporate affairs. They're obviously representing the forestry and wood industry.

We are meeting for two hours this morning, so each organization will have up to 10 minutes to present. Obviously, this is a continuation of our study on the manufacturing sector and the challenges facing that sector. We've looked at the appreciating dollar, the issue of energy costs, the issue of labour, and issues of regulation have come forward as well. So feel free to address any of those in your opening remarks, up to 10 minutes, and then we'll have questions from members until 12 noon.

Thank you very much for coming. Ms. Morgan, would you like to start this morning?

[Marta Morgan, Vice-President, Trade and Competitiveness, Forest Products Association of Canada]

Yes, that would be great.

Good morning, Mr. Chairman and members of the committee. I would like to introduce my colleague, Mr. Tom Rosser, who is appearing with me today; he is FPAC's chief economist.

On behalf of the member companies of the Forest Products Association of Canada, let me first say that we greatly welcome this important opportunity to provide the committee with perspectives regarding the economic climate within which Canada's forest products industry is currently operating.

Your investigation into the issues confronting the Canadian manufacturing sector is very timely, since, in my view, this is an urgent economic challenge that Canada has not yet fully recognized.

By way of background, FPAC is the national and international voice of Canada's wood, pulp and paper producers in government, trade, and environmental affairs. FPAC's 20 member companies include the largest integrated producers of pulp and paper, lumber, and other wood products, with operations across the country. FPAC's members are responsible for 70% of the working forests in Canada.

With annual earnings of over $80 billion, the Canadian forest product industry accounts for over 3 per cent of Canada's GDP. It directly employs some 320,000 people in well-paid highly productive positions. It is the economic engine for over 300 communities across Canada.

Annual exports amount to over $45 billion, making the industry the world's largest exporter of forest products. Clearly, our industry is not only the main pillar of Canada's rural economy, but also a key player in Canada's economy as a whole.

This industry is a vital part of Canada's manufacturing sector and faces many similar challenges to those of other Canadian manufacturers. It is unique in its broad reach across rural Canada, where the industry provides high-tech, high-wage employment in regions where this would not otherwise be readily available.

Mr. Chairman, with that as a backdrop, I would now like to turn to address the subject at hand and provide the committee with a sense of the challenges currently facing Canada's manufacturing sector, particularly as they pertain to the forest products sector. I'd like to talk about three things: the outlook for the industry, what the industry is doing, and how the government can support industry's efforts.

Canada's forest products industry is in a time of dramatic and rapid transformation. We're facing significant challenges. Indeed, over the last few years, Canada's forest products companies have faced a confluence of challenges that some observers have referred to as the perfect storm: high and rising energy prices, increasing competition from low-cost overseas producers, declining demand in some market segments, and a softwood lumber dispute that has drained over $5 billion out of the industry. It is very likely that if these were the only components of the perfect storm, the industry could ride through the rough water with little difficulty. However, while all of these are certainly significant challenges, their magnitude and impact have been amplified by the rapid rise in the value of the Canadian dollar, and this alone is arguably the single most critical challenge affecting this sector at this time.

Consider that the Canadian dollar has risen by over 40% in four years, and there have been significant consequences of this increase for this industry, which is almost entirely export oriented. And while the dollar's rise certainly impacts all Canadian manufacturing, its impact on the forest products sector is even more acute because this industry's input costs are almost entirely in Canadian dollars while the majority of its sales are in U.S. dollars.

I'd like to take a moment on this point. This sector has the largest exposure to both the dollar and energy costs of any manufacturing sector in Canada, particularly on the pulp and paper side. So what happens is that as costs go up--energy, labour, and fibre costs--revenues go down. This has created tremendous pressure for consolidation in the pulp and paper sector over the past few years.

The solid wood segment of the industry has been faring better due to a prolonged housing boom in the United States. But we see that construction boom starting to soften, and prices have started to soften over the last year.

Yet despite all the challenges that this sector is facing, there is light at the end of the tunnel. Global demand for forest products has been increasing steadily over recent years. For example, in paper and paper board, global consumption has increased annually by 3% a year over the last decade. In addition, in the solid wood sector, there are considerable opportunities to create new markets, new geographic markets, such as China, or new applications for traditional products, such as expanding the use of wood in non-residential construction within North America--for example, for schools, light commercial buildings, community centres, that sort of thing.

With this in mind, Canada's forest products industry has substantial strengths that can be used as building blocks for a renewed and revitalized industry. Taking immediate action will allow the industry to capture its share of growing world markets, revitalize its capital stock, sustain rapid productivity growth, and provide high-quality jobs across the country.

So what has the industry done?

The industry has not sat idly by waiting for the crisis to pass. Rather, it has done the opposite. Canadian forest products companies have continued to diversify and invest. Each year, the industry spends over $500 million on research and development, and thus constitutes one of the largest private sources of innovation in Canada's economy.

Moreover, each year it invests $4 million in improving its facilities. This is how it has achieved a productivity level that compares favourably with that of the Canadian economy as a whole, and with that of its US counterparts.

Over the last 60 years, for example, in the solid wood sector of the industry, productivity growth has surpassed productivity growth for the manufacturing sector as a whole, and that sector has increased its productivity by 30% over a six-year period. As we look ahead, the key factor is where future investment is going. It is this that will determine the future and it is this that will determine Canada's prospects in this industry and in the manufacturing sector as a whole.

Finally, I would like to discuss what governments can do. The public policy framework within which the industry operates is a critical competitiveness factor. A government, whether it be federal, provincial, or municipal, is a central player in establishing the industry's business climate or hosting conditions. Government determines taxation levels, environment and forestry regulations, and competition policy, and it regulates transportation. As the industry keeps pace with global competition, government must also keep pace to ensure that hosting conditions are equally, if not more, competitive than the hosting conditions facing our competitors.

Before the dollar began its free ascent, addressing these hosting conditions was important but perhaps not urgent. However, with the dollar's unchecked rise showing few signs of abating, ensuring that Canada has the most competitive domestic policy framework becomes an absolute imperative.

With this in mind, the industry is urging the government to take action in several areas.

The first is to ensure that Canada's investment climate is as attractive as possible. A recent C.D. Howe study concluded that while Canada's overall tax rates are at the middle of the pack among OECD countries, our tax on capital investment is among the highest. Canada is not competitive when it comes to capital investment, and it is capital that will allow our manufacturing industries to continue to thrive.

Perhaps the single most important thing the federal government can do to promote the renewal of this sector is to make the taxation of investment in the forest sector more globally competitive. Analyses have consistently shown that the marginal effective tax rate on investment in Canada's forest industry is the highest of any major producing country in the world, and far higher than that faced by Canada's other resource industries.

Government policy should create incentives for investment by providing accelerated depreciation of capital equipment and tax incentives to encourage new investment.

Secondly, federal competition policy needs to be reviewed, and impediments to market-based adjustment must be removed to allow the industry to achieve further economies of scale. Canadian producers need to be able to achieve the same world-class scale as foreign-based competition and major North American customers. To give you an example, Canada's largest forest products company, Abitibi, is the 21st-largest forest products company in the world. Our top three competitors in North America are the first, second, and third largest in the world. All of them are five times as large as our largest forest products company.

Another example is--

[The Chair, Conservative, James Rajotte]

Can we finish up in about one minute?

[Marta Morgan]

Okay. I had better speed up a little bit.

Another example is our buyers, who are consolidating rapidly, and in order to service such buyers, our industry needs economies of scale in production, services, and supply in order to be their preferred suppliers.

There are a few other priorities for us in terms of the business climate. One of these is further competition in Canada's rail sector in order to bring down rates and improve services. Renewable energy in this sector provides the opportunity for a win-win-win on the economic, the environmental, and the social fronts. Our industry has the capacity to generate a tremendous amount of renewable energy. We already generate enough green energy to power the city of Vancouver, and we could do more. A national renewable energy strategy would provide benefits, both in terms of reducing dependence on fossil fuels--clean air--and also by incenting long-term new capital investments in communities across the country.

Finally, the government can partner with industry on transformative R and D to create new leading-edge products and processes and to diversify Canada's export markets into more non-traditional geographic end uses. My colleague Shawn Dolan, from the CWC, will certainly discuss this further.

By taking action in these five priority areas, governments will help provide hosting conditions for the industry that will ensure its long-term competitiveness and that will support the industry's efforts for transformation to ensure that this industry will continue to remain a strong contributor to Canada's rural economy across the country.

Mr. Chairman, that concludes my formal remarks. I look forward to exploring in further detail any issues of interest to the committee.

[The Chair, Conservative, James Rajotte]

Thank you very much, Ms. Morgan.

We'll now move to Mr. Dolan.

[Shawn Dolan, Director, Corporate Affairs, Canadian Wood Council]

Thank you, Mr. Chair.

Good morning to you and your fellow committee members, and thank you for the opportunity to speak with you and present the concerns of Canada's manufacturers of wood products.

The Canadian Wood Council is a national association representing Canadian manufacturers of wood products used in construction. Through our 11 member associations, we represent thousands of companies of all sizes and from all provinces.

Our members want to be on record that this is an extremely difficult time to succeed in manufacturing in the current climate. Forecasted profits, where they exist, are in steady decline, reducing return on investment rates to the 3% to 5% range, which is far too low for an industry as capital-intensive as ours. Costs are escalating due to factors beyond our control; jobs are being lost, and thousands more are in jeopardy.

I will pass on discussing the impact of the Canada-U.S. softwood lumber dispute on Canada's wood manufacturing sector as it seems to be outside the scope of this committee. Suffice it to say that resolution of this dispute, whether through negotiation or litigation, is not going to make the wood products sector suddenly healthy again. It will simply reduce cost uncertainties, i.e. lawyers and tariffs, as we get closer to the managed trade environment that existed in the past.

It must be said here that our industry has shouldered an inordinate share of the burden in defending the principles of free trade on behalf of all Canadian industries and the Government of Canada.

With respect to the four issues this committee is concerning itself with, namely, the high value of the Canadian dollar, high energy costs, globalization, and the availability of skilled labour, the impact of the Canadian dollar's rise cannot be overstated. Recent analysis by the Conference Board of Canada shows that our industry loses $2.3 billion for each 10% rise in the Canadian dollar. Given that the dollar has appreciated by almost 50% in the last five years, we're talking about annual lost revenues of over $11 billion.

I must point out, Mr. Chairman, that these figures already take into account the potential savings realized by buying productivity-improving equipment from the United States. I've heard the argument several times that the dollar's rise is not that big a deal because manufacturers can purchase equipment more cheaply from the United States. This is a tenuous argument in the best of situations, but it comes close to fallacy for our members, as a large percentage of our members' equipment is sourced in Europe, which has seen its currency rise in a fashion similar to ours, thus negating any buy-cheap advantage for equipment, while sales remain largely denominated in American currency.

Moving on to the high cost of energy, our members have done a tremendous job in squeezing efficiencies out of their operations, far outpacing the improvements across the broader manufacturing sector.

Industry Canada has reported that the productivity gains of the wood industry exceed those of most other Canadian industries. Wood producers have improved their energy efficiency by 17% since the year 2000, compared with a mere 3% for the entire manufacturing sector. Yet the profits do not follow. Clearly, this is not sustainable, and if required input costs continue to rise, as they have in the recent past, hundreds, even thousands, of firms and the communities they support will have to face some gut-wrenching decisions.

To make matters worse, by the middle of the next decade, there may be almost no forests left in British Columbia due to the pine beetle infestation. This infestation could spread to Alberta, and possibly the rest of Canada, if left unchecked.

Globalization, however you choose to define it, represents a vast array of opportunities and challenges. We can talk about the potentially vast opportunity presented by new markets in China, and it certainly may be tempting for governments to seek the next big market as a solution to our current problems, but the fact is there is much to be done to change the building construction culture in new markets, to accept wood where it has not historically been, while here at home a vast untapped market awaits, the non-residential market that Marta referred to earlier.

Public buildings and low-rise commercial projects in North America could consume $12 billion worth of wood annually without any changes whatsoever to existing building codes, yet there still exist procurement policies that actually favour imported steel--a product that injects tonnes of CO₂ into the atmosphere--over home-grown Canadian wood that reduces atmospheric CO₂ and reduces heating and cooling costs for the lifetime of a building.

The availability, or lack thereof, of skilled labour is an issue of growing concern for our members, as it is for employers across the country. In some of our plants, there will be a 50% to 60% turnover in the next five to seven years due to retirements, and in many areas, the replacements for those workers, Canada's youth, are dropping out of high school in near-record numbers.

There is a serious disconnect here that needs to be addressed. It must be said, however, that the government's plan to improve and hasten the acceptance of foreign credentials is a step in the right direction, and we understand that there are issues to be worked out as immigration is a federal concern, while the licensing of doctors and engineers, for example, is largely under provincial jurisdiction.

Having spent 10 years working as an engineer before joining the Canadian Wood Council, I've seen first-hand how frustrating it can be for all involved--employers, workers, and families--when new Canadians cannot practise the craft for which they were trained, mainly due to unnecessary regulation or overregulation in areas such as this.

What can the Canadian government do to help this industry, which accounts for 3% of Canada's GDP--10% in British Columbia--and employs over 300,000 Canadians? There are several things.

One, understand that ours is an industry fighting for its life, with challenges coming from all sides, and commit to helping a cornerstone of Canadian culture and the Canadian economy by following through on the previous government's pledge of support and also by working with industry to promote the use of Canadian wood in construction.

Two, understand that wood is the only building product that removes carbon from the atmosphere, and that concrete, steel, and plastic have all been proven to have much worse life-cycle impacts on our environment in energy consumption, and commit to supporting wood construction through programs such as DFAIT's program for export market development investment and NRCan's Canada wood export program.

Three, understand that ours is an industry that carries an excessive regulatory burden at all levels of government and commit to reducing these unnecessary and unhealthy barriers to success. In the United States, for example, the wood industry can write and implement a new wood construction standard at a minimal cost in a matter of days, whereas in Canada, the process consumes substantial amounts of both money and time, often achieving exactly the same result. We know that the government's smart regulations initiative is a step in the right direction, and we look forward to seeing it succeed. But more work is needed, especially where federal, provincial, and municipal regulations collide.

And four, understand that quite literally, tens of billions of dollars and hundreds of thousands of jobs are at risk. It is true that Canada is a nation of exporters, but it is equally true that we export more than oil.

In closing, let me say this. It is a testament to the men and women of our industry that they have been able to survive current market conditions and still outpace most other industries in terms of productivity gains. Wood construction can and should play a greater role in tackling the issue of climate change. Remember that every cubic metre of wood that replaces concrete in construction removes one tonne of carbon from the atmosphere.

CWC would welcome an opportunity to explain further how government procurement policies could be improved to favour the best environmental building product there is: Canadian wood.

Finally, we have not even covered how critically important residential construction, the backbone of the North American economy, is to our industry. With housing starts beginning a downward trend, it is fair to say that the pressures on our industry will only worsen.

Mr. Chairman, thank you for the opportunity to speak with you today. I would like to offer my assistance anywhere I can as we work together to tackle these tremendous challenges. Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Dolan, for the presentation.

We will now go to questions from members. Just for the witnesses' information, the first round will be seven minutes. That's combined members' questions plus your responses, so we'll ask members and the witnesses to be as brief as possible in their questions and answers.

We're starting with Mr. McTeague, for seven minutes.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Chairman, thank you very much.

Witnesses, thank you for being here today and for giving us a very wide perspective on the challenges facing your industries. I share your concern, as does this committee, over the high rise of the Canadian dollar insofar as it affects your industries and many others.

Specifically regarding the question of the valuation, could either one of you, or both of you in fact, give us an idea, in terms of employment, of just what the transition from a 65-cent to a 90-cent dollar has meant for your industries in terms of layoffs? That would be the first question.

The second one would be how your industry has responded to enhance productivity, to make the kinds of purchases that were suggested by the Bank of Canada some weeks ago as a way of offsetting or compensating.

I would like to ask you a final question, Ms. Morgan, if I could. You talked about the need for more competition in the rail industry, but you seem to be suggesting that as a result of the placement of your associate members, in terms of the international picture--they're relatively small in terms of scale--you weren't yet afforded an opportunity to delve into where the Competition Act falls short. But do you not see a bit of a contradiction? If you're asking for permission for your industry to bulk up and create much larger organizations to meet with international competition--which I think the Competition Act currently gives you--why would that not be a problem when there is in fact, as you suggested, concern with respect to the rail industry as far as its bulking up and its near monopoly?

[Marta Morgan]

Thank you, Mr. Chairman.

To address your first question, it's very difficult to attribute job losses directly to the dollar's increase. I think what we can see in our sector are the 11,000 job losses over the last three years. In the manufacturing sector as a whole within Canada, we saw a drop of 100,000 jobs over the past year. Clearly the manufacturing sector in Canada is facing a variety of challenges leading to job losses in the sector, of which the dollar is a significant one in our sector, particularly on the pulp and paper side, which also confronts high energy costs and other market challenges, making it somewhat more difficult for it to respond.

In terms of the productivity argument of the Bank of Canada, that we should be going out and buying more capital equipment, Shawn has made the point that the usual logic doesn't apply in our sector; we don't get cost savings on capital equipment when the dollar goes up because most of our capital equipment is purchased from Europe. I think the broader issue is that capital investments will be made, and capital equipment will be purchased, where the economy is seen to be a long-term good host to this kind of economic activity.

Investment intentions in the manufacturing sector, and in our sector, I would say, are headed south. What happens with the rise in the dollar is that plants and equipment that otherwise might be purchased and put in place in Canada will be put in place south of the border. So you get decisions that are being made on the basis of the currency, as opposed to being made on the basis of fundamental competiveness, when that currency is expected to continue to be where it is.

I think that's why, from a government perspective, the issue is really, what can you do about that? It's a matter of trying to create the best countervailing or most positive business climate for capital investment you possibly can in order to encourage that kind of investment.

Shawn, did you want to comment on either of those two, before I go to the third question about rail?

[Shawn Dolan]

I would just reiterate the fact that compared with the manufacturing sector as a whole, our industry is a leader in productivity gains over the last five years in spite of all these conditions. So I think it's fair to say that in terms of answering the bell and increasing productivity, our industry has certainly stepped up to the plate. As I said, our industry has increased energy efficiency by 17% in five years compared with 3% across the rest of the manufacturing sector. So the indicators are there that our members are making the effort and, where possible, the investments to make those gains, and still, at the end of the day, they're not getting the return on investment or the payback that a typical investor would be looking for.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Mr. Dolan, on job losses, do you have any figure for the committee?

[Shawn Dolan]

I would just reiterate what Marta has said.

[Dan McTeague, Liberal, Pickering—Scarborough East, ON]

Okay, thank you.

[The Chair, Conservative, James Rajotte]

On the competition question.

[Marta Morgan]

On the issue of competition policy, the challenge we have been facing in our industry with federal competition policy is twofold. One is that in its application the bureau has reviewed recent transactions, and while it has not stopped any recent transactions, in a number of cases it has imposed conditions on the transactions that have resulted in the sale of assets. It has significantly slowed down the conclusion of the transactions, and it has also created a chill on further consolidation within the industry.

The industry is relatively small compared with its competitors. In some segments, in particular, such as the solid wood products sector, where there have been a number of recent mergers, it is quite an unconsolidated industry, comparatively speaking, when looking at manufacturing as a whole. So I think we start from a position of small size, and we are in a world where the competition is getting bigger and getting stronger. One way to address that is through economies of scale, so you can reduce your costs of capital, you can improve your service, and you can put more money into R and D.

In terms of the question about rail, Mr. Chair, I don't see any contradiction in our views. Our members are serviced by rail, but the majority of our mills only have access to one rail line. This gives the railways monopoly power over pricing to our mills, which is a much different starting point for an industry starting with relatively small companies and no global pricing power.

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Morgan.

Thank you, Mr. McTeague.

We'll go now to Monsieur Crête, pour sept minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chairman.

I would like to congratulate you on the calibre of your presentation and for the very specific recommendations you made to the government on each issue. I think that your presentation was extremely well structured.

Let me talk to you about softwood lumber. Now, we have learned there's an excellent chance that the agreement will not come through before the summer. It will probably be postponed until the autumn. At the same time, the US is announcing that countervailing duties will be increased from 10 to 14 per cent. They are applying pressure in their own way. I know that many companies, including a number in my region, the Gaspé, are at the end of the line. So are many other companies in Quebec and Ontario. They are in a very difficult position.

Whether the issue is the agreement or the legislation, it seems that we will have to wait until next fall. In the circumstances, what measures do you feel the government should take? Should it be looking at loan guarantees, or other measures?

[Marta Morgan]

FPAC, as you may know, is a national association with members from across the country. Our members often have different views and different commercial perspectives on the softwood issue, and certainly on the negotiations that are under way. So we don't have an official position or a role.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

I don't want to question the relevance of the agreement. I'm just pointing out that it has not been signed, and probably will not be signed for several months. As a result, we will continue to have the same problems.

Do you have any measures to recommend to the government?

[Marta Morgan]

I think that the most important thing for most of our members is to have a solid agreement, an agreement that is suitable for the Canadian industry...

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

That is what everyone wants, Ms. Morgan!

[Marta Morgan]

That is the most important thing.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Given that the agreement may not be signed for several months and that during that time we'll have to live with the same conditions, are there any measures you would like the government to take?

[Marta Morgan]

We expect the government to do everything possible to reach an agreement that will be beneficial for the Canadian industry.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

If I understand correctly, your businesses do not require any loan guarantees or other types of assistance? You are satisfied with the situation?