Natural Resources Committee on April 1st, 2008

[The Chair, Conservative, Leon Benoit]

Good morning, everyone.

We were debating a motion at the end of the last meeting, which of course carries on today. But if all members are agreeable, we'll leave the motion until later in the meeting so we can get directly to the witnesses today. Is that agreeable?

[Some hon. members]

Agreed.

[The Chair, Conservative, Leon Benoit]

Okay, so we will do that. That will help.

I want to also remind all members of the committee about the meeting with the delegation from the Scottish Parliament. That is at 3:15, actually, at 306 West Block. Right after QP, those of you who have agreed to come could go to 306 West Block, and we'll have a very informal meeting with the delegation from the Scottish Parliament. I appreciate that.

Let's get to the business of today's meeting. Today's meeting is the final meeting of our study on the opportunities and challenges facing the forestry industry.

We have with us today, from the Forest Products Association of Canada, Marta Morgan, vice-president, trade and competitiveness. Marta, you have David Church with you today. You can introduce him when it's your turn to make a presentation.

We have, by video conference, from Terrace Bay Pulp Inc., Hartley Multamaki, vice-president, planning and development. He is here via video conference. That doesn't show on the orders of the day, but that is in fact what's happening.

Also, from Buchanan Pulp Sales, we have Pino Pucci, president. And from Buchanan Lumber Sales we have Hal Brindley, president, and John Adams, transportation manager.

We will have the presentations in the order listed on the orders of the day, starting with the Forest Products Association of Canada and Marta Morgan. Go ahead, please, Marta.

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

Thank you very much, Mr. Chair. Thank you for inviting us here to testify at this committee today.

I would like to introduce David Church, who's the director of transportation at FPAC. He's here at the table with me.

I know that the president of FPAC, Avrim Lazar, has been here to testify in these important hearings already.

We are the national association for the forest products industry. We have members from coast to coast. We represent producers of pulp, paper, and lumber, among other products. So we cover quite a representative swath of the Canadian industry.

We're very pleased to be invited here again today to speak to you about issues of transportation, which are quite near and dear to our hearts. I will be focusing my remarks today on the issue of rail transportation. We have provided for you a leave-behind in French and English that covers the substance of my remarks, so I will keep them brief and leave lots of time for discussion.

The forestry sector is a major client of the railroads; it represents about 25% of the total income of Canadian railway companies. Transportation costs are the second biggest expenditure for that sector.

A cost-effective and efficient transportation system is a critical competitiveness factor for the forest products industry. As with so many other Canadian resource industries, we tend to be located in remote areas and must travel long distances to get our products to market. With regard to the rail system in particular, its efficiency and cost-effectiveness are critical to this industry and its future in Canada. You well know the difficult times the industry is facing right now, from the many witnesses you've heard from during the course of this investigation you're conducting.

There are two key elements of rail service. One is cost, and the other is service. I'll tackle them separately.

We conducted a study, which we released last year, that looked at the cost of rail service to forest companies in Canada. Based on widely accepted methodologies, we concluded that the forest industry is paying $280 million in excess rail charges per year—to the two major rail companies, primarily—above and beyond what would be paid if there were competition in the rail network in Canada.

You will have probably seen last week that the Canadian Wheat Board commissioned a similar study in which they found that grain farmers are paying in excess of $175 million over and above what they would pay under a competitive situation.

The heart of the issue with rail service in Canada is that in a large part of our economy, particularly our export-oriented economies in rural areas, shippers only have access to one line. In our industry, 90% of shipments only have access to one of the two class-1 railways or to a short line that's attached to one of them.

The other issue, and I would say this is an issue that has really been even more predominate in the minds of our members over the last three years, is that of rail service. Rail services comes down to two issues. Do you get the cars that you ask for and that you need to ship your products, and do you get them when you ask for them or at some other time that is not necessarily when you need them?

This has been an increasing problem. It's been a significant issue for our members over the last three years. We have many complaints from our members on these issues. Even in a commodity business such as lumber, for example, the issue of timeliness and reliability of service is becoming more and more important. We've all heard the phrase “just-in-time delivery”. How it works in our industry is that we have huge customers with North American reach, such as Home Depot, for example, who don't want you to just ship them the lumber and dump it in their yard. They want you to know how much they have of your lumber on their shelves, they want you to manage their inventory, and they want you to be able to deliver when they need it.

So to the extent that our transportation system can't provide that kind of service, the costs then fall back upon the Canadian shipper, because it's certainly not the large U.S. buyer who, at the end of the day, is going to bear those costs.

FPAC has been working very hard with other shipper associations and with members on both sides of the House. We have noted with much appreciation the non-partisan consensus around Bill C-8, which was recently passed very quickly by both the House and the Senate, and we're very appreciative of the leadership that was shown on both sides of the aisles on Bill C-8. We are hopeful that this bill will provide some meaningful avenues for shippers to challenge both high rates and poor service by the railways.

The bill contained a number of provisions that should allow shippers to more effectively challenge ancillary charges, which are charges such as fuel charges and demurrage charges that are tacked on top of the rate. It will allow shippers to band together to challenge some of these charges, which is a great advantage because it allows shippers to pool their resources on individual cases where the issues are common to them. It also removes a provision of the Canada Transportation Act that made it very difficult to challenge the level of service being provided.

So all in all, we commend Parliament. This is a positive step; it's in the right direction. We're hopeful that it will be effective and it will move the bar somewhat in terms of providing some avenues of recourse to shippers.

When Bill C-8 was introduced in Parliament, the ministers of transportation and agriculture committed that within 30 days of its passage they would launch a rail service review. We have been working with officials at Transport Canada providing them input with our views on what this review should consist of and how it should be conducted.

It's essential, in our view, that this service review be conducted as quickly as possible, that it be independent, that it be comprehensive, and that it allow for the full participation of shippers. We are hoping that the service review will result in recommendations for practical steps to improve rail service.

So to the extent that this committee is looking at transportation as it affects the forest industry, we would encourage, Mr. Chair, that you support the rail service review and that you support a full, comprehensive, and independent review with meaningful recommendations to come out the other end.

It should be understood, however, that the most fundamental challenge in the long term regarding rail service--and the reason that we find ourselves in this difficult situation as shippers--is the fundamental lack of competition within the rail system. I think you would hear this whether you were looking at the forest industry, or agriculture, or coal, or any other shipper whose products and facilities are located in rural areas.

There are potential solutions to this problem. They are probably not solutions for today. We've just had a bill that's recently passed. We have a rail service review that's about to be launched. But I do think that in the medium and longer term we need to reopen the debate around issues such as running rights and how to make competitive line rate options actually workable--options that already exist within the act. Until we actually tackle this issue of a real competitive threat, we are unlikely to see the competitive outcomes that we'd like to see in terms of the kind of service and rates that shippers receive.

I'll stop there. Thanks again for inviting our testimony today, and I'd be pleased to take questions when it's appropriate.

[The Chair, Conservative, Leon Benoit]

Thank you very much for that presentation. It was very helpful indeed.

Before we go to questions, we still have, I believe, two more people making presentations.

Next we have Hartley Multamaki, vice-president, planning and development, from Terrace Bay Pulp Inc. Go ahead, please, Mr. Multamaki.

[Hartley Multamaki, Vice-President, Planning and Development, Terrace Bay Pulp Inc.]

Thank you very much. It's a pleasure to appear in front of this standing committee.

The Terrace Bay pulp mill is the newest member of the Buchanan group of companies. My friend and colleague Pino Pucci is the president of lumber sales, so we are going to tag-team this presentation.

The Terrace Bay pulp mill was shut down by Neenah Paper about a year and a half ago. It was shut down for nine months. We purchased that mill and restarted it. It is one of the largest pulp mills in North America. It is directly and indirectly responsible for the employment of about 1,000 people along the north shores of Lake Superior.

Obviously, one of the biggest issues for us is transportation. It's a very large cost. We have three options: rail, marine, and trucking. What I was going to do was get Pino to talk about the rail issue, and I will follow up with a conversation about the other two options that are out there.

Pino, I'd ask you to make that presentation.

[Pino Pucci, President, Buchanan Pulp Sales]

Thank you.

I'm actually just going to start off here by adding to some of Marta's comments, which we full-heartedly agree with.

On June 20, 2007, Hank Ketcham, chair of the forest products industry competitiveness task force, wrote a report and noted that the task force was formed by a group of leading industry executives in partnership with senior federal policy-makers with an objective to identify means of accelerating renewal and innovation in Canada's forest sector and key actions required by industry and government to realize needed change.

It was noted that the challenges facing the industry were structural in nature, and that if left unaddressed they would lead to a trajectory of continued decline for the sector. Here we are in April 2008, and truer words could not have been spoken.

Of the four major elements detailed, one of the primary ones noted by the task force was that the failure of Canada's rail transport policy to provide a competitive check on the market power of the railways cost Canada's forest industry $280 million, as Marta noted. This equates to approximately 15% of the industry's total freight bill.

It was also noted that while the ability of the railways to extract monopoly rents from shippers substantially undermines the competitiveness of the Canadian forest products industry as a whole, this situation is particularly damaging to the cost competitiveness of those production facilities operating in the most northerly and remote communities. And that would surely include some of the facilities we are discussing with you today.

We fully agree with the task force's findings and believe that the government allowing this corporate concentration is a major factor allowing this to happen.

We believe that 15%-plus additional freight charge is not only decimating Canadian industry, but that it is only being accomplished through an artificial limiting of supply and that this surely goes against the Combines Act, which was replaced with the Competition Act in July 1986, designed to prohibit monopolies, misleading advertising, bid rigging, price fixing, and other means of limiting competition.

I'm not sure if everyone got a copy of my March 3 letter to CP Rail. I hope you have, but here are a few additional critical issues we in this industry are facing today.

First, in light of the significantly reduced demand on virtually all railcars in the forest industry--and that involves lumber, pulp, paper, OSB, plywood, etc.--every single sector is currently facing rail rate increases. This is only being accomplished by putting cars into storage and not renewing leases, thereby artificially limiting supply so that they can drive rates in this monopoly system. To us, this not only makes us non-competitive, but makes it impossible to sell to and service customers when these tactics are employed.

Secondly, our pulp mill, a recent restart, is producing approximately 120 cars of product weekly. We have a hard cap and cannot even order more than 70 cars per week, as CP, which is the line into the mill, cannot supply, and we do not have the ability to bring in other cars to the mill. In effect, we will eventually face running the mill to approximately two-thirds of its capacity, which would skyrocket overall costs and therefore force us to shut down all operations once again for good.

Third, we have been told by our rail account representative that any reduction in rail in any rate at all is not an option, regardless of market conditions. We believe in a free market. Rates should be determined by supply and demand. This is not the case here.

We also wish to take this opportunity to lend our support to not only our industry but to the Canadian farming industry, which just last Tuesday asked the Canadian federal government for a full review of what it costs the railways to transport grains. They noted that “currently farmers are being victimized and are being gouged through the freight rates that are being charged to export the grain”, since most farmers are forced to use either the CN or CP line, creating a virtual monopoly on rail transportation.

Earlier this year the Canadian Transportation Agency ordered changes to revenue caps that could save prairie farmers as much as $72 million annually in freight costs. We in the forest products industry are asking for the same intervention to save us from the inevitable path of curtailment and closure these monopoly practices have set us on.

Thank you.

[Hartley Multamaki]

Thanks, Pino. I'd like to pick up from there.

As an inland producer at Terrace Bay Pulp, we do have other alternatives, I guess, but not satisfactory alternatives. One of them is marine transportation, and I wanted to talk for a few minutes about that.

We are on Lake Superior and do have the option of going out the seaway. I would point out that when we restarted that mill, one of the directions—and I think both the provincial and federal governments have strongly encouraged this direction—was to seek alternative export markets out of North America. Pursuing those alternative markets, primarily in Europe, means using a combination of either rail and sea—that is, marine traffic—or just marine traffic. The issue with marine traffic for us, of course, is that a return voyage between Terrace Bay on Lake Superior and Europe is about $136,000. It's a very, very expensive way of doing business, and the primary costs within that are things like pilotage fees. So the seaway is a very difficult and expensive option for us. It's something that needs to be looked at.

Again, we do rely very, very heavily on the railway, and I don't want to take away from that, but we do have marine transportation options as well. We also use trucks, which are problematic, in that their loads are relatively small, and to travel long distances with them is expensive.

I think the other point to understand is that with the rail lines, our competition doesn't face the same issues. Elsewhere in the world, railways do not behave in the fashion that Canadian railways do. In fact, they're happy to try to become as competitive as they possibly can and to provide a higher level of service at every opportunity. That's what we're competing with. Certainly our competitors are able to bring their products to market in a more cost-effective and more efficient manner at times than we are.

In closing, I would also point out that rail transportation, from an environmental perspective and a carbon perspective, is a more suitable method of transportation than using trucks. For every tonne of pulp that we bring to market, if we used the railway and/or marine transportation, it would be a more environmentally friendly way of doing business. We recognize this, and the forest products industry as a whole has been very, very responsible across the country in attempting to reduce greenhouse gases and to contribute to a reduction in carbon emissions. So the railways have a role to play as responsible organizations, and a role that we, as Canadians, have provided to them. I think they need to provide more competitive service, and instead of constantly increasing prices and constantly reducing services, they need to participate in a more reasonable fashion.

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Thank you very much to both of you gentlemen for your presentations.

We'll go now directly to questioning, starting with the official opposition. Mr. Boshcoff, for up to seven minutes.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Thank you very much, Mr. Chairman.

I'd also like to thank the committee for agreeing to this extra meeting on this topic specifically, and for allowing me to invite these specific witnesses. The issue of transportation, particularly as we've discussed it here, really does warrant its own day. So thank you again.

This issue with regard to railcars in particular came to a head, I would say, about six weeks ago with the rather urgent correspondence from Terrace Bay Pulp. I'm sure that FPAC is aware of that. This can't just be affecting one mill or one operation in the country.

Can you give us any kind of idea of what the national impact is, so that we can gauge it? What have you heard from others in the pulp industry specifically? When you listed the long list of operations in forest products, it seemed there wasn't anybody who wasn't affected. We're just trying to figure out how big a national problem this is.

I think both FPAC and Terrace Bay Pulp could address this question.

[The Chair, Conservative, Leon Benoit]

Okay, let's go first to Terrace Bay Pulp.

[Pino Pucci]

From our perspective, in talking to other customers and/or suppliers.... That is why I referred to both our lumber side and the pulp and paper and OSB plywood sectors and all that.

We've recently had meetings and conversations with both rail lines and the people they supply and the customers we actually ship to. I mean, it's something that's going on everywhere.

You have a forest industry in crisis and reduced demand, definitely, from paper mills in Canada, pulp mills in Canada, and lumber mills in Canada. In our specific situation, tying into others, you probably have a reduction in demand in excess of 50% of the cars you require. On top of that, they're announcing an up to 7% rate increase in light of all that.

The way they're doing this is by just putting everything back into storage or by not renewing leases, and therefore there is this artificial limiting of supply. And they're using that to drive the rates.

I'm hearing that from other western producers in all industries, whether it be OSB or anything to do with forest products.

[The Chair, Conservative, Leon Benoit]

We'll have Ms. Morgan.

[Marta Morgan]

Yes, this has been an issue that has been raised by our members consistently over a number of years. We've seen particular issues in the west, in British Columbia, for example.

What happens in practice is that a company will request a certain number of railcars. They won't get the number they requested, or they'll get them on a different day. They'll ask for ten a day, and instead they'll get 40 on Friday. This is a tremendous cost to companies, because they have to have employees on shift to load the cars. So they will be prepared for a certain delivery schedule, and then when that delivery schedule doesn't happen, they will incur the costs of sending that shift home and bringing them back when the cars arrive.

They also incur costs charged by the railways. The railways apply what is called a demurrage charge, which is a charge when your car sits there and isn't loaded after 24 hours. And it's 24 hours after they deliver it, no matter when they deliver it, whether that's when you asked for it or not.

One of our member companies is currently storing their pulp outside in Chetwynd, B.C., because they cannot get railcars to move the pulp out of that mill.

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

Thank you very much.

[The Chair, Conservative, Leon Benoit]

Did you have something to add, gentlemen?

[Ken Boshcoff, Liberal, Thunder Bay—Rainy River, ON]

I only have seven minutes, so I have to ask this question. You can add it on, if that's okay.

What we've heard now are some relatively long-term solutions or intermediate solutions. What do you think the federal government can do immediately? Because this is obviously a current situation that is only being exacerbated on a daily basis. I think your situation represents an urgency. If it's not a national crisis, then it's certainly coming towards one.

[Pino Pucci]

Okay, I'll add something to address that. The simplest way to put it for us is to say that we produce about 120 cars of pulp today, weekly, at Terrace Bay Pulp. We cannot order from CP, the only line we have to that mill, any more than 70 cars a week.

So if you try to punch into your railcar order system 80 or 90 or 100, you cannot punch in any more than 70. They do not have the ability, as the only line in, to supply the cars we require, nor do we have the ability to do anything about it by bringing in any alternative cars or anything like that.

Meanwhile, they have a bunch of railcars parked in storage or returned on leases and not renewed leases. One way or another, probably the most immediate action is somehow getting them to pull cars out of storage and having the government get involved in leasing the cars and making cars available to us.

[Hal Brindley, President, Buchanan Lumber Sales]

May I have one second, also?

I'm Hal Brindley. We have two lumber mills, Longlac and Nakina, and of 700 cars we've ordered at those two mills since January, we've only had about 380, or less than 56%.

Not only do we have the cars that Marta has already talked about getting to the mills, but once they're at the mills, they park them on sidings waiting for room on a main line to take them out. We've had cases when we've had cars parked outside the mills, loaded, and we've already invoiced the customers, and they're sitting there for up to two weeks, because they don't have facilities on their lines to handle the volume.

That's happened. We've had 17 days, 19 days. That's right on the CN report we get every day that says they're parked outside the mill. So they don't have the facilities to bring cars to us or to take them away once they are loaded.

[Hartley Multamaki]

Can I make one final comment? At the Terrace Bay pulp mill we in fact are downpiling pulp out in the parking lot.

We have so much capacity, but of those 120 cars we need, we're only getting 40 to 70, and the excess capacity has filled up our warehouse. All the warehousing space that's available to us is full, and we're downpiling in the parking lot, as Marta has said some of her clients are doing as well. So it is a huge issue.

Ultimately what will happen is that mills will be forced to close down as a result of the practices of the railways, and people will be laid off. We're in a very difficult situation.

[The Chair, Conservative, Leon Benoit]

Do you have a comment, Ms. Morgan?

[Marta Morgan]

I can say two things to that in response, Mr. Chair.

One is that I think the industry now needs to take advantage of some of the provisions that were recently enacted in Bill C-8, which should make it more effective for industry to raise complaints with the Canadian Transportation Agency on level of service.

Second, from a policy and legislative perspective the government needs to be encouraged to quickly get going on this rail service review to make it real, to collect the data about what's going on with individual shippers like this, and to look for some real solutions.

[The Chair, Conservative, Leon Benoit]

Thank you.

Now we'll go to the Bloc Québécois. Go ahead, Madame DeBellefeuille, for up to seven minutes.

[Claude DeBellefeuille, Bloc, Beauharnois—Salaberry, QC]

Thank you, Mr. Chairman.

Thank you for your presentations.

Ms. Morgan, there's a lot of talk of rail transportation, but in your brief I noted that truck transportation is also mentioned. The witnesses who were with us via videoconference also talked about marine transportation.

Can you describe to us the current situation in Canada and give us a breakdown, by province, of the rail, marine and truck transportation situations? How important is rail transportation compared to marine and truck transportation? I am not only interested in hearing about the situation in western Canada, but in all of Canada's provinces.

[David Church, Director, Transportation, Recycling and Purchasing, Forest Products Association of Canada]

In overall terms of the percentages that the industry uses for each of the modes, it's probably 70% by rail and 30% by truck. Most of the product that we ship goes to the United States. For the most part, to get the tonnage to export or to offshore destinations, it has to go either by rail or by truck to the port.

Province by province and certainly in western Canada, the vast majority of the tonnage that's shipped out goes by rail, simply because you cannot get enough trucks up to the mill locations to serve the tonnage that's coming out of those mills. Virtually all of it goes by rail.

In Alberta it's the same thing. Saskatchewan, I would guess, is the same thing as well, simply because of the distance to the markets. As you get farther into Ontario and Quebec, it's probably less by rail than it would be out west; it's probably 60% or 55% by rail and 45% by truck. As you get into Atlantic Canada, it's probably the same thing.

What you need to remember is that because of the volumes we're producing and the nature of the product, the mills prefer to ship by rail. If they had a choice, they would prefer to ship by rail because of the volumes coming out of the mills and the product being manufactured. The difficulty is that the railways cannot provide the service for the mills in Quebec and Ontario, so they ship by truck.

I hope that answers your question.