International Trade Committee on May 3rd, 2016

[The Chair, Liberal, Mark Eyking]

Thank you.

That wraps up the time and that wraps up our panel this morning. We did well.

Thank you again for coming from the west coast and being with us, and for your submissions. We had good questions from our MPs.

Right now people are standing by in B.C., up bright and early, and we're going to do a video conference. To the witnesses who are here, you're welcome to stay with us in the audience, but we're going to suspend now for five to ten minutes just to get everybody set up.

Thank you very much.

[The Chair, Liberal, Mark Eyking]

We're going to start our second panel. We see you guys are up bright and early in British Columbia.

Just for our witnesses in British Columbia, we've had a couple of meetings now on the softwood lumber issue. A few weeks ago we had the eastern part. We had the Maritime Lumber Bureau and Quebec and Ontario here. Earlier this morning we had a panel here from British Columbia. The B.C. Lumber Trade Council was here, and also the Canadian Lumber Trade Alliance.

With us via satellite video conference, from Harmac Pacific, we have Cameron Milne. We also have, as an individual, Harry Nelson. He's an associate professor from UBC in the faculty of forestry. Welcome, gentlemen.

We're going to get started here. It might be the first time you guys have been on a panel at our committee. You're allowed to have five minutes each for opening comments, and then MPs will ask you questions and we'll go back and forth.

It's sometimes a little difficult because there's a little delay here, and I encourage MPs to keep your time short so we don't get into an awkward situation.

We're going to start off with the witnesses. Who wants to go first?

[Cameron Milne, Fibre Supply Manager, Harmac Pacific]

I will.

[The Chair, Liberal, Mark Eyking]

Okay, go ahead, Mr. Milne.

[Cameron Milne]

I am going to start with a bit of an introduction to our company, if you could indulge me.

I represent Harmac Pacific. We are a B.C. company operating in Nanaimo. We produce northern bleached softwood kraft, and we are in Nanaimo on Vancouver Island. We have an annual capacity of 375,000 metric tons of pulp and 450 gigawatt-hours of green power, 205 of which are used and sold on the BC Hydro grid. For those who are not familiar with that kind of capacity, that is equivalent to powering up about 18,500 homes.

We are unique in Canada. We are the only pulp mill operating where employees own a large proportion of the company, approximately 25%. There are over 330 employees, each with an investment of $25,000. We were formed in 2008 when our former owners went bankrupt and our management, together with the union, collaborated and were able to lead a successful effort to conclude an employee purchase of the assets from the receiver.

Since we began business in the fall of 2008, we have invested $125 million in capital improvements, as well as $27 million of green transformation funding into energy conservation and environmental improvement projects. We have completed the installation of a $45-million green energy project and we have hired 150 new employees in the community.

We continue to look for opportunities to leverage our site infrastructure to diversify and grow our revenue streams. We market our high-strength NBSK pulp, which is a northern bleached softwood kraft pulp, around the world. The majority of our production is sold overseas into freight-logical regions, primarily in Asia, with a heavy balance to China. We do, however, sell a small amount, approximately 5%, of specialized product in the U.S. This product is used in a non-woven fabric for highly technical medical uses, and we are the only ones in the world who produce this fibre.

Switching a little to the softwood file, I want to talk about the integration of our industry and the importance of the sawmill sector to us.

Our operation consumes approximately two million metres of wood chips per year for the production of the pulp, and approximately 170,000 metres of hog, which is primarily bark and sawdust, to burn to produce steam, which in turn supports the pulp mill and produces the green power.

Fibre is purchased competitively on the open market. The pulp industry and the lumber and plywood solid wood producers are highly interdependent.

In the early days following the development of the lumber industry, pulp mills were established based on the utilization of chips, sawdust, shavings, and waste bark products from lumber production. The economics of the pulp and paper mills were based on waste products. Those same economics still apply today.

In a similar manner, the solid wood producers are dependent on the pulp industry to dispose of their waste products and provide additional revenue. Pulp mills rely on a healthy solid wood sector, and anything that undermines the production of lumber is detrimental to the viability of the pulp and paper industry. The amount of waste fibre from sawmills has declined on the coast due to the reduction in the number of operating sawmills, and the result has been multiple closures of pulp and paper mills.

Hence, our desire is that the two governments reach a negotiated settlement in the softwood lumber dispute, one that meets the needs of U.S. and Canadian lumber producers and protects the overall lumber capacity of the solid wood sector. This will provide the security that both sectors require to remain viable, to make the necessary investments in their businesses, and to continue to provide the many benefits to society and local communities.

That concludes my remarks.

Thank you.

[The Chair, Liberal, Mark Eyking]

Thank you, sir. Thank you for those opening comments, and for being on time.

We are going to move over now to Mr. Nelson for five minutes. Go ahead, sir.

[Professor Harry Nelson, Assistant Professor, University of British Columbia, Faculty of Forestry, As an Individual]

Good morning. Thank you for the opportunity to appear before the committee.

I've shared my comments with you ahead of time, so I can be briefer. I'm drawing on both my research experience as well as my experience from being involved in various rounds of the dispute, going back a good 15 years or more.

There are three points I'd like to emphasize to the committee as you investigate this issue.

The first is to understand that in some ways these different notions of how we manage our forests really influence the way these discussions take place. The Americans view with skepticism our public ownership of timber and the policies around how we manage that, and that's just an unfortunate by-product of this dispute. Anything we do in terms of policies to try to improve or strengthen either our forest sector or the competitiveness of our industry tends to be viewed with a high degree of skepticism.

That's something to keep in mind. Because of the risks associated with this kind of dispute—and my feeling is that we'll find ourselves being approached by the Americans with something around how we manage this trade agreement—it's important that we keep the flexibility we have to develop policies that are in our best interests, not necessarily just to meet American objectives, which mainly tend to focus on limiting access to the U.S. market.

Along those lines, I think there are two voices that are often neglected in these kinds of discussions. One of those is the smaller manufacturers, the secondary industries and others that are highly reliant on the U.S. market. Even though individually they are quite small, they still make up a considerable proportion of the value, the employment, and the trade that we have with the U.S., and if anything they are even more dependent on the U.S. market than some of our producers here in B.C., so I'd want to make sure that they have an opportunity to offer their input in any kind of agreement or discussions that are presented for negotiation.

The other one is that here in B.C., and I would imagine elsewhere in Canada, we're seeing some evolution in how we think about forest management, with new partnership arrangements, often with aboriginal communities and others. Again I think we want to allow ourselves the opportunity to be able to do that without having to worry about being constrained by such an agreement.

I'll end there and perhaps just pick up on something that Cam said. For much of the industry, it is a tightly-woven web of interconnections, and if we hope to gain the maximum value from our forest resources and have a healthy forest, we'll need a healthy forest industry. Therefore, taking into account these different perspectives, as you're doing, is essential to making sure that we can strike a good agreement.

With that, I'd be happy to take any questions.

[The Chair, Liberal, Mark Eyking]

Thank you, Mr. Nelson. Thank you for that submission.

We're going to start with questions. We're going to start with the Conservatives.

Mr. Doherty, you're first.

[Todd Doherty, Conservative, Cariboo—Prince George, BC]

Thank you, Chair, and thank you to both of our guests today.

Mr. Milne, I will start off with a comment. I understand the challenges that we have in today's environment for fibre supply. I have cattle producers and dairy producers who at one point not so long ago could back up a pickup and get the chips they needed for bedding and what have you, so the cattle producers and dairy producers in my region are crying foul as well. They would love to see timber supplies available so that they could get their chips back.

My question is to Mr. Nelson.

Mr. Nelson, you mentioned in your paper that between the two different types of combinations that we've seen in past agreements, whether it was a quota or an export tax, you believe that an export tax would probably provide for better market access.

More and more of our major producers now have operations on both sides of the border. Would an export tax not raise our lumber prices, thereby penalizing some of our smaller producers who do not have operations on the other side, and benefit our U.S. producers?

[Prof. Harry Nelson]

It's a good question. One of the outcomes of both a quota and an export tax—the purpose behind these is to restrict Canadian supply—would be to raise U.S. prices. Both the export tax and a quota will do it.

In both cases, the challenge is if you are a small producer and you don't have quota, you cannot access that U.S. market, so there's no benefit to you from that higher price. Under an export tax, if you can cover the cost of production, at least you can get some of that benefit. From my perspective at least, that's why there is a benefit to the tax, even for the smaller producer.

[Todd Doherty, Conservative, Cariboo—Prince George, BC]

I'm from B.C. We are seeing increased challenges in accessibility to timber supply. Annual allowable cuts are being decreased, so both our small and large producers are having to work harder and are incurring higher costs to get their timber supply and get it to market. An export tax would likely penalize those smaller producers because we're already seeing higher costs of operations due to the timber supply issues we have in B.C. Is that not right?

[Prof. Harry Nelson]

It depends. It can be context-specific. We have a market pricing system or market-based system in B.C. Given that so much of our production still goes to the U.S., in some ways the value of our timber floats with what we get for that timber in the U.S. market, even if there is an export tax or not. I think the larger challenge we're having in B.C. right now is accommodating or adjusting to the changing timber supply.

I think that the export tax in itself is not the major influence on the viability of these smaller or larger producers. What really impacts you is the overall supply within your area and then how much you might be able to find on the open market. That's an area where we can certainly do things to strengthen the competitiveness of the sector in B.C.

[Todd Doherty, Conservative, Cariboo—Prince George, BC]

Mr. Milne, I appreciate that you see your shareholders every day and I applaud your company for taking bold steps. I followed your company's restructuring back in 2008. That is commendable, and I'd be interested to see that same structure being replicated right across the country.

While 5% of your product goes to the U.S., is there a preferred option or a preferred quota? Is there a combination that you would like to see and that your shareholders are also asking for?

[Cameron Milne]

We would prefer an export tax for the same reasons that Harry Nelson has explained. It at least allows people access to market. I'm thinking of some of the smaller operators that supply us with chips and fibre.

[The Chair, Liberal, Mark Eyking]

Your time is up, sir.

I know you're on a roll with good questions, but thank you, gentlemen.

We're going to move over to the Liberals now.

Mr. Fonseca, it's your turn. You have five minutes, please.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you very much, Mr. Chair.

Mr. Milne and Professor Nelson, thank you for your presentations.

Mr. Milne, I want to congratulate you on all the success you've had from 2008 forward. You say the majority of your sales are overseas. Has it always been that way from 2008, or have you diversified and increased those market shares overseas over that time?

[Cameron Milne]

The pulp is sold at the destination. The majority of the markets depend on where the most inexpensive shipping is. Our markets have changed over time.

When we started in 2008, we were largely unproven. Our customers were reluctant to deal with us because we were employee-owned. There was concern over our viability.

When we started in 2008, we were very highly leveraged into China. It was a new emerging market. Over the years, as confidence in our operation continued, we got back to some of our other markets in Australia, southern Europe, and other Asian markets as well. We're highly leveraged in Asia because that's the logical freight area, and most of that business is in China. We have since pulled out of northern Europe.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you.

Our committee had the opportunity to be in your beautiful province two weeks ago and to hear about the trans-Pacific partnership from many witnesses. I want to get your take on the industry and your company in particular: how you feel about the TPP and the potential ratification of the TPP? How would that affect your company?

[Cameron Milne]

I don't exactly know. I haven't looked at the agreement, but I'm told there are some positive benefits for the forest industry, so I will take it at face value.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Professor Nelson, I know you wrote and published an op-ed piece about how a lot of consolidation happening within the industry has hollowed out the middle class and led to a few companies controlling a large proportion of the forest resource. Can you expand on that? Is that the trend going forward?

[Prof. Harry Nelson]

It's the trend we've seen in B.C. In my perspective, in my opinion, it has actually weakened our sector in some ways, because it's made it more dependent. When one company faces challenges, those impact or ripple throughout the broader forest sector economy.

It's also something that I feel is an internal policy that we here in B.C. could probably address. I do not see any kinds of structural reasons that we had to have the consolidation, and I think I've written about that. In my view, I think there are things that provinces can do internally to further enhance the competitiveness of their own forest sectors. In my view, this is one area in which we could try to improve—I'm picking up on the previous member's comments—and perhaps turn back the clock a bit and try to improve access to fibre through open market or other means as a way to increase the opportunity for that middle class.

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

Thank you.

We heard from some previous witnesses that to get a new SLA done, you need political will and industry will. I also feel that much of what was said was around some of the economic and environmental factors that we may have little control over, such as the currency, the fluctuation of the currency, and how well the economy's doing here in Canada or stateside.

Do you think that right now, where we are as compared to where we were in 2006, we're in a good position to set a new agreement with the United States?

[Prof. Harry Nelson]

Is that question directed towards me?

[Peter Fonseca, Liberal, Mississauga East—Cooksville, ON]

It could be to either of you, but I think Professor Nelson would probably be best to address it.

[Prof. Harry Nelson]

Okay. Here's my shot at answering that question. I think from a political will perspective, it is promising in the sense that both the Prime Minister and the President have made commitments to try to negotiate such an agreement. I worry that this probably isn't the highest priority for the President, even though it's critically important for Canadians. I think that's a positive check mark to try to reach a good deal.

When one looks at the industry, on one hand I think that perhaps some of the American fears that there is this wall of wood that's going to come crashing down from B.C. or western Canada may have abated, so perhaps there's some latitude for a reasonable agreement that allows us flexibility such as we had in the past agreement. I feel somewhat encouraged by that.

Offsetting that, the U.S. housing market is very slow to recover, and so I count that as kind of a halfway factor.

I feel positive that the environment right now would be a good one in which to reach a good agreement for us, subject to nothing drastic happening in the next few weeks.