Industry Committee on June 15th, 2006

[Marta Morgan]

We are not familiar enough with the state of the current negotiations to be able to comment on that.

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

I would suggest that you provide us with your recommendations, in case my prediction comes true, which would be unfortunate.

Furthermore, one of your recommendations is to have a strategy based on competitiveness. That includes many concrete elements. Does that mean you would like the government to take a sectoral approach, at least in the case of lumber and the forest industries?

Would you, for example, like it to include certain elements in this strategy and that it distinguish between not intervening and not supporting any of the conditions for success. Am I correct? Could you give us your opinion on this issue?

[Marta Morgan]

We are a big supporter of sectoral approaches to competitiveness.

In terms of competitiveness, we feel that it is very important to take into account certain sectoral characteristics. If the government and the industry were to meet in order to look at the situation from every angle, whether it involved regulations, transportation, or other angles, we would have a better idea of the challenges facing us but also of potential changes.

We are therefore of the opinion that it would be beneficial to the industry to share its perspective with the government and together, craft a strategy. The government actually plays a very important role in all aspects of our activities.

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

Mr. Dolan, if no softwood lumber agreement is signed before the summer and if there is no implementation before the fall, I would like you to tell me if you expect the government to put in place any specific measures.

[Shawn Dolan]

Our members, especially in Quebec, will be hurting if there is no signed agreement before the fall—and as you said, in dire ways. I think the government's problem would be whether or not putting in place some short-term loan guarantees, or whatever the government deems appropriate, would provide the Americans with ammunition to pull back and the agreement would then not come along until winter or next spring. Are your short-term measures creating a longer short-term problem?

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

In the current tennis match, the Americans hit a smash by announcing an increase in the rates. On our side, we have the choice of simply responding to this smash by trying to get the ball back on the court or by clearly indicating that we are playing the game. Do you understand the comparison I'm making?

[Shawn Dolan]

It's a difficult situation. I think the perfect storm analogy is more appropriate in Quebec than probably anywhere else in Canada. The reduction in the allowable cut is cutting profit forecasts because certain companies can't produce as much product as they would have been able to otherwise.

On energy costs, my opinion is that there are things the government could do in the short term, for example, through loan guarantees. But from a national perspective, is the other shoe going to drop on the American side? The teams of lawyers working on this issue would be better positioned to answer on those kinds of fine details.

I certainly think the sooner the agreement is signed, then at least one uncertainty is removed from the equation. Whatever imperfect climate we're proceeding within, at least everyone knows the ground rules. We can go forward from there and tackle the next colossal problem we have.

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

With respect to the forestry sector, I would like to know if you think it's important that the federal government craft a sectoral strategy.

[Shawn Dolan]

I think it's appropriate in this case because the collective weight of the issues we're facing is a burden that very few other industries are facing, certainly very few others that are of importance to the Canadian economy. If you're talking about trying to have a policy that is equivalent across all sectors, if there was ever a case for a sector-specific exception, I think this is it.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Mr. Carrie.

[Colin Carrie, Conservative, Oshawa, ON]

Thank you very much, Mr. Chair.

I want to thank all of you for your very timely presentations to the committee. We only have a few minutes to ask some questions. I'm going to try to make them as short as possible in order to give you enough time on the record to answer them.

The first one I'd like to ask is this. You mentioned a national renewable energy strategy and that your sector would benefit from something like that. Mr. Dolan brought up the point that simply using wood instead of steel is much better for our environment. Could you expand a little on that?

The second one is on the free trade agreement. You mentioned that we should pursue more free trade agreements. We had the auto sector here. Frankly, I'm from Oshawa, and there are a lot of unions against the free trade agreement with Korea. In your sector, you mentioned that free trade agreements could help. Could you elaborate on that?

The third thing you mentioned was on what the government can do tax-wise. Could you comment on the budget, the corporate tax cuts, and the GST coming down? Do they go far enough for you? You mentioned capital tax depreciation and things like that.

Could you give a general comment on those three questions? That would be great.

Thank you very much.

[Shawn Dolan]

Well, I'll tackle the environmental carbon question, and then I'll pass it over to Marta.

Wood, by its nature, being a natural product, consumes carbon to be creative, whereas when producing concrete, steel, plastic, or any other manufactured material, those processes pump carbon into the atmosphere. As I said, the simple equation is that for every cubic metre of concrete used in construction where you could have used wood, you're putting an additional tonne of carbon into the atmosphere.

If you look at the quantities of steel and concrete that go into non-residential, low-rise construction in North America, it is potentially a very significant contributor to the entire climate change debate. Carbon sequestration is going to be included, as I understand it, in the second phase of the Kyoto Protocol, whereas you can gain credit for building with wood and using that process to remove carbon from the atmosphere, versus other building products.

[Colin Carrie, Conservative, Oshawa, ON]

Can you review how much concrete would compare to one tonne of CO₂?

[Shawn Dolan]

It's one cubic metre. If you replace a cubic metre of concrete with a cubic metre of wood, the reduction would be between 0.75 and 1.2 tonnes of carbon.

[Colin Carrie, Conservative, Oshawa, ON]

That's quite a bit. Thank you.

[Marta Morgan]

I'm glad you asked this question, because I think this is one of the really exciting things about this industry. The forest products industry really has the potential to become and to be a truly sustainable, regenerating industry, and we are well on that path. Obviously, there's more to be done, but we're well on that path.

Renewable energy is one element of that, both on the wood side, in terms of the inherent properties of the product, and on the production side. We've been moving closer and closer to being able to use every bit of fibre we get in our production processes and to maximize its use, either by turning it into products or by turning it into energy. We know that we can go further on this front. Bioenergy in the pulp and paper sector, for example, has been a major assist to the sector in confronting higher energy costs, because it's replaced renewable fuels.

So the question for us, since we've gone partway there in pulp and paper, and we generate 60% of our energy requirements through our production process, is, how can we go further? How can we go faster?

It would involve incentives to capital investment, because for the most part, it's a capital change that allows you to move to renewable energy sources. So on incentives to capital investment, we've been working hard with this government and the previous government to make sure that the CCA accelerated depreciation for equipment that allows us to generate electricity applies to our sector. It had been left out in the past, and we've been working with the current government to put these regulations through. We think more could be done, and it would have great pickup by the industry if incentives were provided on a market-neutral basis for the implementation of renewable energy and production.

Also, I think we need to make access to the grid easier. We see ourselves moving to becoming a net producer and contributor to energy. We need to be able to get market rates for that energy and connect into the system at a rate that provides us with adequate remuneration.

On your second issue, free trade with Korea, we have been supportive of a free trade agreement with Korea. It has some potential benefits for our industry in terms of tariff reductions and the potential to accelerate some of the work that's been happening with Korea on building codes and standards that will make it easier for us to sell our products into the Korean market. That being said, I think we have to recognize that Asia is a very challenging market for us, that there are significant subsidies to capital investment in Korea--and I would add, in China--which can create quite important distortions in global markets if they are left unchecked in terms of creating excessive investment and capital investment that pushes down prices globally.

I think our free trade agreements need to find a way to start to get at some of these more difficult issues, and I don't know what the answer is there. I wish I had an answer for you. But I do think this is the next wave of issues we're facing, certainly in our industry.

On your third point about budget tax cuts, we were very pleased with the elimination of the capital tax. I think everybody knew it was a really dumb tax and that it was time for it to go. We were very pleased to see that happen. We were very pleased to see the implementation of corporate tax cuts. I think we are headed in the right direction. But have we done enough? I don't think we've done enough on the issue of taxation on capital investment. We still rank quite high in terms of our competitors, and given the challenges we're facing, I think that's an area that we really need to focus on.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Carrie.

We'll go to Mr. Fontana.

[Joe Fontana, Liberal, London North Centre, ON]

Thank you, Mr. Chairman, and thank you very much for a comprehensive presentation that addresses some of the issues.

I would agree with you that there's no doubt the industry has been very resilient faced with a whole bunch of challenges you've taken on in productivity and in some of the things you're doing. Let's look at the challenges in certain areas. I would agree we should do anything we can with respect to incentives on the energy side of things, in promoting wood not only here but around the world.

From when I was in China and the Middle East and elsewhere, I know people are yearning for Canadian wood products. Whether or not you use a free trade instrument, there are some challenges, obviously. Korea is one, where they may want our wood, but we don't necessarily want their cars unless they're prepared to give us access. I think these sectoral issues have to be managed. There's no doubt that we need to look beyond the United States as our single most important market, and I think there is a world yearning for Canadian wood, for all the reasons you've indicated.

But let me address two areas.

Even if we can't do anything about the dollar, I would ask what it is we need to mitigate it. Even the Bank of Canada has said, and everybody thinks, the dollar is going to continue to appreciate, so what instrument can we use? Is it taxes? Is it capital cost allowance? And should we look at how quickly and by how much we allow certain changes in that so that you can continue to be as productive as you possibly can?

I'd like to know about human resources in the sector, because every sector this committee has heard from, be it the auto sector, the building sector, or the manufacturing sector, says in seven to ten years we face an incredible challenge. I don't care what kind of economy you want to build; you can have all the capital in the world, and all the technology, but if you don't have people, you don't have anything. Therefore, I'd like to know, what is it we need to do on the human resources side to attract and retrain a whole bunch of people all over the place? In order to sustain a great industry, we have to find you the people who might want to work in that area.

Could you talk a little about what kind of capital cost allowance we have to put in place, and how quickly and how much, to mitigate the situation? How do we deal with energy costs? And what do we do about the human resource challenges you face in your industry? What are some of the incentives, or what are the things we need to do, to make sure you have the people to work in this very productive sector?

[Marta Morgan]

On the first question, I think the dollar is rising because of forces that are largely, though not entirely, outside our control. Oil and gas prices and U.S. deficits are clearly driving our dollar more than our fundamental cost competitiveness within Canada, though we think the Bank of Canada has some margin within which to manage the dollar and has shown no evidence of managing it to the lower end of that margin.

That being said, I think taxes are a good place to start. Our focus really is on the structural policy elements of business climate change: tax, competition policy, rail policy. We're not focused so much on the spending side, although in some areas government spending is very helpful.

On the tax side, we have been proposing a specific investment tax credit for capital investment in this sector that would be time limited and refundable and that would have the advantage of allowing companies that are in a non-taxable position to take fiscal advantage of it. We know the Canadian Manufacturers and Exporters association also has a proposal for accelerated capital depreciation, similar to what the United States put in place in the early part of this decade when their dollar was very high and they wanted to support investment in their manufacturing sector. That kind of approach would also be very helpful to our sector, though unless it is refundable it presents a challenge for companies who perhaps need the investment the most and might not be able to take advantage of it if it isn't refundable. This also is a very good proposal, which I would recommend to the committee.

[Joe Fontana, Liberal, London North Centre, ON]

Would you propose the same thing on the human resources side of things as a way of dealing with attracting and/or training new people?

Secondly, at the end of the day, how much of an effect are taxes and the issues you talked about going to have, based on your input costs? If we fixed the taxes, accelerated the capital cost allowances, and gave all kinds of incentives for you to use on the energy side, how far would that go towards ensuring that this sector, which is very important to our GDP and presently involves hundreds of thousands of jobs across our country, continues to be a sustainable sector for us?

[The Chair, Conservative, James Rajotte]

A quick response.

[Marta Morgan]

I'll let Shawn speak on the human resources issue, since I didn't touch on that.

[The Chair, Conservative, James Rajotte]

Mr. Dolan.

[Shawn Dolan]

The labour shortage--the looming labour shortage, the present labour shortage, however you look at it--is a problem not just for manufacturing; it's a problem everywhere. It's a problem just about everywhere you go.

One of the things I've noticed in recent years is how universities have really started to make significant gains based on the high level of federal investment that was made in roughly the past decade or so, which in certain areas really brought the cream of the crop to the top in areas where universities are developing specialty labs and that kind of thing. There isn't a nearer program for what you would call blue collar work. Kids coming out of college in trades and so forth don't have that level of high-level support, and I think it's something that could be looked into. It's almost an opportune moment to really look at this, because the payback on something like this, as we've seen with the universities, is that it takes almost a generation for things like this to get up and running and to see the results, like the level of PhD candidates who are being produced in Canada now versus 10 years ago when the investment in these programs was less.

The second thing I would say, and this is a society-wide problem, is that there is a level of disconnect between Canadian youth and Canadian society in a lot of areas. With the needs that our society and economy have, to see the level of kids dropping out of high school today is incredible really. There is something, and I don't know what it is, that is driving kids away from participating and contributing to society. I know this is a problem that's been around for years and years, but it doesn't make it less of a problem.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Fontana.

We'll go to Mr. Van Kesteren.