Thank you very much. I'm very pleased to be here.
When I got the notice, I must confess I thought we could finally make our point. But in doing a little bit of the research that's required, I want to present the industry in a bit of a different context. I must admit that you forced me to look at it through different eyes. So bear with me just a couple of minutes while I tell you how I've seen it.
The industry, in my lifetime of 30 years, has always had cycles. They were three to five years. They always happened. The cycles were tied to negotiations in Canada or the U.S., to labour agreements, and the 30 days of inventory that the publishers always carry. So if they wanted a price reduction, they upped the inventory to 45 days, etc. The power in those years was with the producer. Demand for newsprint products was increasing 1.5% to 2% a year, so we weathered the cycles and we did what we had to do.
In those days, there were five manufacturers of paper machines in Canada. The newsprint industry was invented in Canada in the 1900s. All of the paper machines in North America, the original ones, were built between 1908 and 1918, 1920. The technical session of pulp and paper in Canada in the 1960s and 1970s used to attract 15,000 people. Margins were double digits, and they used to start with twos and threes.
Everything started to change in the 1970s. The power--if I can call it power--shifted to the consumer, and the consumer was also the purchaser. There are probably only 12 or 13 individuals in North America who buy 75% of the newsprint produced in this country. The publishers became protectionists, because of the cycles, and they started to build and own their own mills.
Another fact was that because margins were so high, newsprint and paper was a commodity that was sold FOB the purchaser's dock. What did that mean? We shipped it anywhere in North America, price of freight included. But remember that in North America the infrastructure is built from east to west and we do business from north to south. There's a huge cost. It's three times more expensive to ship to San Francisco than it is to Japan.
The environmental groups in the 1970s started to ask for elemental-free pulp, recycled newsprint, and to get rid of the sulfide mills. So TMP mills were built. The technology by then had switched to Scandinavia and Europe. The industry was only some 60 years old and already the technology had switched to Europe. All of us went to Europe and Scandinavia to buy our new paper machines.
The policy--if there was a policy in Canada--was to facilitate the extraction of the fibre resource. I say that tongue-in-cheek because I was part of the process. We got loans for capital and grants to increase production. Provincially, the policy was that we had a hundred years' supply of the world's best fibre and it was renewable, so use it. Because of the grants and because of some of the environmental pressures, the job creation program said, “Let's have a policy on how we use this fibre. We're going to force it through a sawmill to make better use of it, and that's going to create jobs.” So the program came in the 1970s where stumpage was tied to the price of the product and how it was used. It was a windfall for the provincial governments. It created jobs. It created wealth. In those years, there were 24 newsprint machines being built in North America in one single year, all of them costing around $200 million. It was a huge industry with very significant jobs and capital. Fibre was plentiful.
Then a little bit of a bug came, and the bug was South America.
We invented hardwood pulping in northern Ontario, believe it or not. It was one of the first jurisdictions in the world to use poplar for pulp. The South Americans discovered it right away, and immediately, because technology moves faster than people nowadays, they built pulp mills that were twice as big as ours. So there was a challenge on price.
In the 1980s the industry responded. Dave is quite correct; they responded with five-year contracts. Increases were twos and threes. There was more tonnage being built everywhere to drive down unit cost. That's the way Canada responded. Industry started to consolidate. Offshore shipments came into North America for the first time. Most of the mills converted because of low energy; electrical costs became unstable. Plants were being started up all across Canada and the U.S. There was U.S. protectionism. That was the idea: if you were a Canadian manufacturer, you should have a plant in the U.S., and we were all doing that.
The problem was that in the mid-1980s the capital cost was not being met. Returns were single digits and always below ten. In the 1990s and 2000s--and this will wrap it up--the 100-year supply of fibre was not so realistic any more. South America drove down pulp prices to the very bottom. Cycles were one and two years now. Consolidation and going back to core business became the norm. Publishers pulled out, and the demand for newsprint started its negative slide and never stopped. Every year from the mid-1990s it decreased 2%. In the last few years it has actually exceeded that, at 2% and 3%.
China started to build two machines a year, and it now had almost two times the North American capacity to make newsprint. Europe and Scandinavia reinvented themselves, going out of newsprint and into printing grades. Their national policy of being competitive through innovation, writeoffs, and technical support are all integrated. All the North American paper machine builders disappeared in the 1990s. The technology was very firmly planted in Scandinavia and Europe. North America became totally focused on cost-cutting, outsourcing, flexible work practices, longer contracts, and 25% recycling--all the things that drove our prices down--but in Canada and the U.S. all the mills except for a few shifted to the right-hand side of the cost curve. We started the downward trend that can't be stopped.
What I'd like to say now is that the pulp and paper industry is what it is. We need to build on our strengths; our strengths are that we have the best fibre in the world. No one can take that away from us. No, we cannot compete with the Asians and the South Americans. Their mills are 10 years old; ours are probably, on average, about 50 to 60 years old. We can't compete with them on costs. Power is no longer 3.5¢; it's 6.5¢ across the country.
Dave is quite right, and I commend him for what they have done. We used to be five man-hours a tonne for newsprint; now we're around two, so labour has brought itself up to the table.
In the future, what I think we need is both a national and a provincial policy for the forest industry. An example is the beetle infestation in British Columbia. It is the largest in North American industry. The technology does exist to control it, but it's not applied.
In five to seven years there probably will be a 20% to 30% drop in the allowable cut in British Columbia alone. Quebec has decreased its allowable cut by 30%. Ontario—and I say this a bit tongue-in-cheek—would like to drop its allowable cut, but hasn't yet announced it, which will probably be in terms of 20% to 25%.
The Scandinavians, through their national policies, grow two to three times the amount of fibre on the same hectare; same climate, same topography.
We need a national policy that converts us from a pulp and paper industry to a biofibre industry in Canada. Canadian companies cannot do this on their own; their balance sheets don't allow it. At best, they can provide depreciation capital—and some, indeed, are—but they sure can't convert to biofibre based on their balance sheets. And oil has to stay at $60 to $70 to permit this.
And there's the Chinese and Asian industry, a huge industry right now, dependent on insourcing all of its fibre, as it doesn't grow any of its own trees—or very little.
The technology is not in North America to make pulp and paper. It's not. We are not the world leaders, okay? China, Asia, and Scandinavia are, and we have to recognize that.
I think we have to start the process of reinventing the industry, leapfrogging the technology to biofibre industry, and do it quickly. There are some alliances in North America, which we need to build on, but I also think what we need to do in Ontario and Quebec is to build on our strengths, not our weaknesses. We do have the best fibre in the world. Why not increase its yield through national and provincial policies? Why not leak the technology in pulp and paper to biofibre through the centres of excellence that we have and use the talent that still exists in North America before it disappears? We do have the people who invented some of the industry.
Last, I think our strength, which most people think may be a weakness, is the one-industry towns that Dave talked about. They have the infrastructure to collect this fibre. They're destitute, but their outlook is a strength that can be focused to do this differently. I think we need to provide the leadership and the policies to light the way towards this—not necessarily pave it.
That's all I wanted to say. Thank you very much.