Industry Committee on Sept. 10th, 2010

[Mike Wallace, Conservative, Burlington, ON]

Thank you very much.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Wallace.

Thank you very much, members of the committee.

I would like to thank our witnesses, the union representatives and the Mayor of the Town of Dolbeau-Mistassini.

This meeting is suspended until 1:30.

[The Chair, Conservative, Michael Chong]

I would like to welcome you all to this 34th meeting of the Standing Committee on Industry, Science and Technology taking place today, September 10, 2010.

Before we begin with our business at hand, I'd like somebody to move a motion to adopt our committee budget, which you should have in front of you, for the amount of $16,700 in order to pay for witnesses' travel.

[Mike Wallace, Conservative, Burlington, ON]

So moved.

[The Chair, Conservative, Michael Chong]

So moved by Mr. Wallace. Is there any debate? Seeing no debate, I'll call the vote.

Some members of the committee don't have the budget. Would you like the budget first, Mr. Pacetti?

Is there any debate about the budget for the committee for this hearing?

Go ahead, Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Mr. Chair, my only question would be about the amounts used to estimate the cost for Toronto witnesses and Quebec witnesses. Are these normal estimates or are they on the high end?

[The Chair, Conservative, Michael Chong]

They are the normal estimates.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you. That's it.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Pacetti.

Are there any other questions about the budget proposed? Seeing no further questions, I'll call the vote.

(Motion agreed to [See Minutes of Proceedings])

The budget has been adopted. Thank you very much.

We have in front of us, on our third panel today, Monsieur Boivin,

who is the Reeve of the Regional County Municipality of Maria-Chapdelaine.

We have Mr. Stephenson, the assistant deputy minister of the trade policy and negotiations section of the Department of Foreign Affairs and International Trade. From Export Development Canada we have Madam Hendricks, the vice-president of the resources group, and Mr. Hodges, the account manager of the resources group.

Finally, from the Conseil de l'industrie forestière du Québec, we have Monsieur Lachapelle,

who is the Director of Supply and Markets.

Welcome to all.

We'll begin with an opening statement from Monsieur Boivin.

[Jean-Pierre Boivin, Reeve, Regional County Municipality of Maria-Chapdelaine (Quebec)]

Thank you, Mr. Chairman.

I, too, would like to thank the Committee on Industry, Science and Technology for inviting me to appear this afternoon to present the concerns of the Town of Dolbeau-Mistassini and the entire RCM of Maria-Chapdelaine regarding the closure of the AbitibiBowater paper mill.

As has already been stated, the RCM of Maria-Chapdelaine has the largest commercial forest in Quebec. Between 1927 and 2007, the year the plant became the new AbitibiBowater entity, we had an efficient paper mill located close to the resource, equipped with excellent technology and skilled workers.

In 1998, the Alliance company owned the mill. Equipment was modernized. I am referring to machine number 5, which produces a circular SCB paper, as we call it in our jargon, and machine number 2, which produces what is called book paper. There was also the addition of a cogeneration plant which produced steam and electricity. The idea was to bring down the energy costs Mr. Paterson referred to this morning. Without wanting to, those involved may actually have laid the foundations then for a future integrated forestry complex.

In Dolbeau, we had a pulp and paper unit, an energy unit and an entity that processed the sawmill's leftover wood. In Mistassini—between Dolbeau and Mistassini runs a small river—we had a sawmill for lumber, a planing unit where we produced chips and biomass residue that could then be used at the cogeneration plant. Throughout the non-organized areas—in other words, the large forest lands—we had logging operations.

In 2007, Abitibi-Consolidated and Bowater became the new entity known as AbitibiBowater. Two struggling companies were merged to create a new one which soon got into trouble as well. Everyone knew that and had predicted it. We know what happened next. This morning we were discussing the trade dispute with the Boralex group, the confirmed financial problems, the Companies' Creditors Arrangement Act and, finally, the permanent closure announced on August 24.

Prior to these events, we had a profitable paper mill and enviable facilities from any standpoint. The mill was turning a profit despite a difficult economic climate. The Companies' Creditors Arrangement Act had the effect of weakening the Boralex's cogeneration plant. That was when they began breaking up what we had and what we were so proud of—namely, an integrated forestry complex.

For us, the future means again setting up a real integrated forestry complex, what we call in our jargon a “fibre maximization centre”—in other words, a complex that meets the expectations of the Government of Quebec as well as those of the forestry community and the industry. In order to meet economic, social and environmental requirements, the following conditions must be met: the right type of wood and the right use, total processing of logs in these facilities, maximum job creation through different fibre processing units, and reduced environmental impacts by limiting transportation and transshipping. We are even talking about reduced deterioration of roads caused by hauling wood chips.

The ability to reposition ourselves as part of an integrated forestry complex rests essentially on the following: the proximity of forest lands; sawmills and pulp facilities which require little upgrading; an already established cogeneration plant interested in maintaining its operations—here I refer to Boralex—; skilled, well-trained workers such as the ones we were talking about before lunch; and a community prepared to invest in order to resume operations.

We want to create a complex that meets the expectations of industry, the Government of Quebec and even Mr. Paterson. Abitibi wants to move away from producing newsprint. That's not a problem in our area; we don't produce any. The facilities can be converted to produce new products; all the experts have told us that. And, as a community, we have invested close to $400,000 to identify potential solutions. Those studies will be released soon.

We are there, with a cogeneration plant and use of the biomass. So, everything is in place. We are saving on transportation, and we are even eligible for carbon credits. We even have a rail network that connects the Municipality of Dolbeau-Mistassini to the facilities at the Port of Saguenay. So, exports are facilitated. What we want to create in Dolbeau-Mistassini is what everyone would like to see: a viable, integrated forestry complex.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Boivin.

Mr. Lachapelle, please proceed.

[Yves Lachapelle, Director, Supply and Services, Quebec Forest Industry Council]

Thank you very much, Mr. Chairman.

First of all, I would like to thank you for inviting the Quebec Forest Industry Council, or CIFQ, to appear before the committee. I would also like to extend the apologies of our CEO, Mr. Guy Chevrette, who had a prior commitment and asked me to replace him.

I'm sure you can understand that the CIFQ is not appearing this afternoon to discuss a particular case. We are here to talk about the situation of the forest industry as a whole.

Our industry has, for some years, been going through a cyclical crisis which, in the softwood lumber industry, is the result of a decline in housing development—primarily in the United States—and, in the pulp and paper industry, is associated with a considerable drop in the consumption of a number of paper products, especially in the wake of the exponential development of electronic media. The Quebec forest industry is also experiencing a major structural crisis, as the cost of fibre in Quebec is the highest in North America because of its quality, and wood chips are generally the most expensive in the world.

The pulp and paper industry is in the midst of a monumental crisis because of a radical drop in the consumption of newsprint, as well as printing and writing papers. It is especially in Canada and Quebec that the consequences are being felt. Six or seven plants that produced these kinds of paper have already shut down, and I'm sure you know that newsprint production is still far too high in relation to North American and European demand. If that trend continues, the plants will continue to shut down in Quebec. That conclusion seems inevitable because of the cost structure, the distance to markets, a high exchange rate and less and less competitive labour and power costs. We have no doubt that you are all aware of the situation in the pulp and paper industry as regards newsprint. Consequently, we are sure you are not surprised to see plants shutting down.

It is no surprise that industry consolidation is occurring, because leaders of each of the political parties, at both the federal and provincial levels, asked that the industry restructure, and restructuring involves consolidation in particular. It is not only that, but it does mean consolidation. So, the Canadian and Quebec industry begun to restructure and company consolidation is not over yet.

As you know, the industry is having trouble coping with this consolidation, because this cyclical and structural crisis is now occurring in the midst of a significant financial crisis. The reconversion of existing plants to other market niches presents major technological and financial challenges. At the same time, banks and financial institutions are refusing to refinance struggling forestry companies. As for governments, they refuse to offer loan guarantees to companies at a commercial rate, which would nevertheless be perfectly legal, based on the legal opinions we have received. I'm sure you know that in Quebec, Mr. Guy Chevrette has made this request on many occasions in recent years.

We know for a fact, because we have been working on this for several months now, that a return to sustainable profitability for our industry requires innovation, but that money is lacking. In that regard, several weeks ago the federal government announced the introduction of a $100-million program over four years to fund innovative projects. We said that this was a step in the right direction, but that it was not enough, because $100 million for all of Canada means $25 million per year. We know full well that a single innovative project may require investments of some $200 million for a single plant and the program requires that the company invest 50% of that amount. However, the necessary cash is not available.

I'm sure you can easily understand the problems we are facing. Yes, there is a need to diversify; yes, there is a need to innovate. But, as I'm sure you understand, without a large scale program, the process will be very slow, even though a number of projects are already on the table. We are aware that the industry will never be the same again. We are also aware of the different avenues to be explored. There is no doubt in our mind that you are also aware that we need substantial assistance to bring all of this to fruition.

Without government aid, some development and innovation projects that companies are bringing forward will likely see the light of day, but not at the same speed as the speeches; rather, at the speed associated with financial availability.

The industry will never again be what it was. If the future seems promising in the mid and long term, restructuring our industry will, unfortunately, involve consolidation in the short term.

Thank you.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Lachapelle.

Now we're going to have representatives of the Government of Canada, beginning with Madam Hendricks from Export Development Canada.

[Justine Hendricks, Vice-President, Resources Group, Export Development Canada]

Thank you.

I would like to thank you, Mr. Chairman, and member of the committee, for giving us this opportunity to address the committee today.

Given the current challenges posed by the economic conditions, your study could not come at a better time. It is of critical importance.

Access to credit is vital for companies of all sizes. As a crown corporation, Export Development Canada plays an important role in helping Canadian companies access credit and protect themselves against a variety of risks. This is our mandate; it is what the Government of Canada created us to do 65 years ago.

What does EDC do? Briefly, we provide commercial financing and insurance solutions to Canadian companies, helping them to export and invest internationally. This includes loans to foreign companies looking to buy goods and services from Canada; working capital loans to Canadian companies to help them fulfill their export contracts; loans to help Canadian companies invest abroad; working with trusted partners by providing guarantees to banks, making it easier for them to lend; using our new domestic powers to enter into transactions that fill a financing gap; insurance to protect Canadian companies against a variety of risks, including non-payment and political risks; bonding services to help Canadian companies guarantee their performance and equity participation.

We do all of this, both directly and in partnership with Canadian and international financial institutions. We do it on commercial terms, without annual appropriations from Parliament.

While I cannot speak to or comment on company-specific information for reasons of commercial confidentiality, I would like to speak briefly about our work in forestry overall.

The forestry sector is vital to Canada's economy. The industry's annual contribution to our gross domestic product was approximately 1.7% in 2009. It is the economic cornerstone of more than 300 communities from coast to coast.

The industry is highly dependent on trade, and the recent economic downturn, as you know, has created serious challenges for forestry companies of all types and sizes. As a result of the economic downturn, we're seeing a great deal of financial restructuring in companies of all sizes. This is primarily due to increased competition from foreign producers, extraordinarily weak North American demand for lumber and newsprint, and generally weak global demand for all products.

The Canadian softwood lumber industry in particular is still experiencing difficult economic conditions as a result of the collapse of the U.S. housing market, the sector's largest customer.

At EDC, the forestry sector is one of our largest and most important. In 2009, EDC provided financial solutions to 538 different forestry companies. The total volume of forestry exports supported for these companies was just over $16 billion. As of August 31 of this year, EDC served 456 forestry companies, for a business volume of approximately $8.6 billion.

While EDC's services are needed in good times, they are needed even when times are difficult. In response we are stretching our capacity more than ever to support our bank and our customers. It is important to note that EDC operates in the commercial sphere just like a bank. Like any bank, customers must be creditworthy to be eligible for our support and they must demonstrate their ability to pay back a loan on market terms.

EDC is also bound by regulations of Canada's international trade agreements, such as the Canada-U.S. softwood lumber agreement. We cannot and do not provide subsidies to any industry. However, what we can do for Canada's forestry sector, we are doing.

EDC is helping forestry companies primarily by helping their banks continue to provide support. In doing so the banks are exposed to less risk themselves, and they are therefore better positioned to continue serving their customers.

EDC also provides accounts receivable insurance, ARI, to Canadian exporters, primarily to cover any losses if their customer is unable to pay for their shipment. With ARI, EDC will refund 90% of the cost. This insurance enables financing. With EDC's ARI, a company can then work with its bank to margin the insured receivables and get access to more working capital.

As the economic downturn taught us, Canadian companies need to diversify beyond their traditional markets. For the sectors to remain competitive now and in the future, they need to break into global supply chains of more emerging markets. We are seeing many of our customers doing just that already, and they are prospering as a consequence.

Despite the challenges we're seeing right now, new technology and emerging global markets will present future opportunities for Canada's forestry sector. EDC is actively working with Canadian forestry companies to help them grow and diversify their customer base beyond the U.S. market.

Together with DFAIT, EDC has organized forestry trade missions to Chile and Russia. Recently, EDC and DFAIT organized a reverse trade mission whereby Chilean buyers met with more than 20 Canadian forestry companies. The goal of these missions is to introduce foreign buyers of forestry products to Canadian providers, to target and penetrate global markets where the need for services matches Canadian expertise. We are also in the early stages of organizing an information session to Canadian forestry companies on exporting into China.

We have a team dedicated to the resource sector, which includes the forest industry, agriculture and fisheries. Furthermore, we have officers abroad located in the main emerging markets. We are therefore well positioned to offer our Canadian exporters the best possible support.

Thank you. I will be pleased to take your questions.

[The Chair, Conservative, Michael Chong]

Thank you, Ms. Hendricks.

Lastly, we'll have a representative of the Department of Foreign Affairs and International Trade, Mr. Stephenson.

[Don Stephenson, Assistant Deputy Minister, Trade Policy and Negotiations, Department of Foreign Affairs and International Trade]

Thank you very much, Mr. Chairman.

I would like to thank the committee for the opportunity to address you this afternoon.

As Assistant Deputy Minister for Trade Policy and Negotiations at Foreign Affairs and International Trade Canada, I engage on issues related to the forest sector through the implementation of the Canada-U.S. Softwood Lumber Agreement, and through my responsibilities for the management of the North American Free Trade Agreement. With me today is an expert on the softwood Lumber Agreement, Mr. Colin Bird. He is the director responsible for managing the Agreement.

The Canada-U.S. Softwood Lumber Agreement has provided stability to Canadian softwood lumber exporters at a time when the entire forest sector is facing unprecedented economic challenges and structural adjustments. It returned approximately $5 billion to Canadian forest firms, and brought an end to the fourth round of trade litigation in this long-standing dispute. Canada worked closely with provinces and interested stakeholders throughout the dispute to achieve a lasting resolution. This close collaboration continues in the context of implementing the agreement.

Canada agreed to put in place export charges and, for some provinces, quotas for softwood lumber exports. More specifically, provinces subject to the Softwood Lumber Agreement export measures can choose between two alternative regimes. Option “A” consists of an export charge that ranges from 0% to 15%, depending on the price of softwood lumber. Option “B” includes both an export charge of between 0% and 5% as well as a quota, both of which vary depending on the price of softwood lumber. Funds collected through these export charges remain in Canada and are returned to the provinces.

Our entire industry and our government would prefer free trade in lumber. But these export measures provide a far better trade environment than the alternative of continued, and unpredictable, U.S. trade actions—by this I mean countervailing and anti-dumping investigation. Under the Softwood Lumber Agreement, the United States is prohibited from taking such trade actions.

Having agreed to export measures, Canada pledged not to provide grants or other benefits that would undermine or offset those export measures. Certain exceptions to this obligation are provided by the Agreement, for example for pre-existing measures and measures related to forest management or environmental protection. How to interpret this obligation under the Softwood Lumber Agreement remains an area where we have differences with the United States.

There is currently an arbitration under way in which the United States has challenged certain programs of Ontario and Quebec, including loan and loan guarantee programs, as circumventions of our export measures. Canada has worked closely with Quebec and Ontario to defend these programs. Among the issues before the tribunal is whether to consider benefits provided to pulp and paper operations that are associated with softwood lumber producers as potentially offsetting the export measures. Canada has argued forcefully that they do not and that they have no impact on exports of softwood lumber products to the United States.

We fully expect the tribunal to agree with us. We anticipate the tribunal's final ruling will clarify this matter, at least with respect to the types of programs at issue in this case. The tribunal's ruling is expected late this year.

The softwood lumber agreement has provided stable and predictable access to the U.S. market for Canadian softwood lumber producers. This has been especially important in the recent economic climate. The agreement has enjoyed the support of Canadian industry and provincial governments. Canada works diligently to ensure its terms are respected.

Foreign Affairs and International Trade Canada works closely with other federal departments and agencies as well as with provincial governments to ensure that initiatives in the forest sector respect Canada's obligations under the SLA. We have worked with Natural Resources Canada on significant initiatives, including the $1-billion pulp and paper green transformation program, the $100-million investments in forest industry transformation program that was launched just last month, and the $170-million program of other initiatives in support of market diversification and innovation initiatives for the forest sector, about half of which will be invested in Quebec.

Together with the ongoing engagement of EDC, which my colleague has outlined for you, these initiatives seek to facilitate the development of a sustainable and competitive forest sector in a manner that respects Canada's obligations under the softwood lumber agreement and other trade agreements.

I trust that this information is useful to the committee, and I look forward to answering your questions.

[The Chair, Conservative, Michael Chong]

Thank you, Mr. Stephenson.

We'll have about an hour of questions and comments from members, beginning with Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

I would like to thank the witnesses. While the subject is an interesting one, it is not particularly easy.

I would like to focus for a moment on the testimony provided by Mr. Boivin and Mr. Lachapelle. We have already heard three or four hours of testimony and we are no further ahead now than we were before. However, we do know that people will suffer, and that employees have already lost their jobs and may well lose their homes. I am trying to reconcile your testimony with that of Mr. Boivin and Mr. Lachapelle.

Mr. Boivin said that there is access to raw material, to trained workers and to plants, and that investments have already been made—in other words, everything is there. Mr. Lachapelle, you made the point in your testimony that there are other cuts still to come. The picture is more negative. You said that we were far from our market and that the exchange rate is hurting us. That is nothing new.

By way of example, I would like to tell you a story I heard in recent months. I was told that we were importing lumber from China. I wonder whether there are markets that could possibly be further away. If our competitive capacity amounts to that, I think we have a problem. I am trying to reconcile your two points of view, but I'm having a lot of trouble doing that.

Mr. Boivin, I know that you made a good presentation. I agree with you that investments have been made and that people don't understand why the companies involved are not able to manage or maintain those investments, as well as the jobs they decided to invest in last year in Quebec.

[Jean-Pierre Boivin]

Mr. Lachapelle talked about that.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

You can comment once you have heard what Mr. Lachapelle has to say, because I would like to give him a chance to respond.

[Yves Lachapelle]

In the Quebec forest industry, we have serious structural problems. We developed based on a certain paradigm requiring that we process certain volumes. We are still trying to maintain our competitiveness by focusing on reduced costs, large volumes, and therefore, economies of scale. But we have come to the end of that paradigm.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Our time is limited.

You represent the companies, right?

[Yves Lachapelle]

Yes.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

How long have they been active in Quebec? That didn't just happen yesterday. It goes back some 30, 40 or 50 years.

[Yves Lachapelle]

The industry developed in the 19th century.