Good afternoon, Mr. Chair and members of the committee. Thank you for the opportunity to speak to you today about the forest industry.
It's truly an exciting time in the forest sector. The industry has a strong story to tell, one based on leadership and partnership, perseverance, and overcoming adversity. Canada's forest sector is emerging from an extended crisis that has been felt across the country. We are now once again seeing growth in traditional markets. The industry is now growing through the production of innovative high-value goods and materials based on new business models and new processes. Imagination and innovation are leading to new commercial opportunities for wood fibre in nanomaterials, pharmaceuticals, and other bioproducts that are helping to transform the industry.
Natural Resources Canada has taken a leading role in the transformation of the sector as an innovative science organization, as an investor, as a creative thinker, and as a partner of choice from the research to the marketplace. The forest industry remains an important part of the Canadian economy from coast to coast. This is particularly true in rural Canada, where over 200 communities depend on the forest sector. While there is very good reason for optimism, there are ongoing adjustments that are having very real and significant impacts on communities, families, and businesses that have for generations produced commodities that enjoyed strong global demand.
I would like also to congratulate this committee on its strong and perceptive 2008 forest industry study. I am pleased to report that governments and the industry itself have acted on many, if not most, of the committee's recommendations.
I'll move to my presentation.
The first slide presents some statistics that I hope are reasonably familiar to you. The purpose here is to make the point that the forest sector remains an important part of the Canadian economy. With 10% of the world's forest cover, we are a forest nation. The forest sector makes up 1.2% of Canadian GDP, which has been stable for the last five years, about 10% of manufacturing GDP, $28.5 billion in exports last year, and we are still the number one softwood lumber exporting country in the world.
The map on the next slide gives you an indication of the 700 facilities across the country related to the forest sector. There are 209,000 direct jobs in every province and most of the territories. If you were to use a multiplier, that number would be up over 600,000. This is primarily and often an economic driver for rural communities and many aboriginal communities.
We are a forest nation. The history of our development, the history of our settlement, the history of the railroads, our early banking were shaped and built on the forest sector. The forest sector remains vital today. When I speak to folks who aren't familiar with the forest sector, there are a few things that I think are important to remind people of, because not everyone has the same base. I myself have only been working in this sector for four years.
First of all, the forest sector and its products are renewable. That's an important thing to keep in mind.
Second, trees are carbon. A number of things come from that, but one of the less obvious is that everything you can make from a barrel of oil you can also make from a tree.
Finally, the forest industry itself is an ecosystem. This is important, because the input to the sawmill, the log, comes out at the other end, and only about 50% to 60% of that log is used for timber. The rest is waste, but that waste product is then used by the pulp mill. Those chips are the input to the pulp mill to make paper. So when one part of that ecosystem goes down, the whole ecosystem feels it and the whole ecosystem is threatened.
In particular, and through my story, you'll see that today the solid wood side of the business, lumber, is doing quite well, the pulp and paper side, less so. The sawmills depend on the pulp and paper sector for 20% to 25% of their profits, so they care. They need the pulp and paper sector to be doing well. We need to think of the industry as an ecosystem rather than as just individual companies.
Turning to the next slide, in your 2008 report you talked about a perfect storm. The year 2008 probably was the height of that perfect storm. You could have been forgiven for thinking that both God and man were against you if you were in the forest sector in 2008.
Not only did you have the cyclical fluctuations of the currency appreciation and the collapse of the U.S. housing market followed by the global recession, but if there had not been a Canadian industry to soak up the lumber domestically, things would have been much worse. At the same time, the U.S. was subsidizing its pulp and paper mills through the black liquor subsidy to the tune of $25 million. On top of that, there was the mountain pine beetle infestation in B.C. moving over into Alberta, which devastated some of Canada's most valuable forests.
Firms and industry did what they had to do. They did the rational thing. They consolidated. They retrenched. It was painful. More than 150 mills were closed and 125,000 jobs were lost, with more than 30% of the workforce laid off. Eight major Canadian forest companies filed for creditor protection. All of that had to happen before new investments, such as those pictured here, could begin to happen.
In that environment, the Government of Canada led discussions with industry, the provinces and academia in developing strategies about the future. Really, three big areas were chosen: promote transformative innovation, diversify markets overseas, and grow the North American wood market.
Keep in mind that in the fall of 2006 the softwood lumber agreement was finally settled with the United States. Industry realized at that point that going forward they could no longer continue to depend on the United States as the sole customer. It had become essential to diversify markets away from the United States. As you'll see, we've actually been reasonably successful at that.
In speaking to those three big prongs, the first being promoting transformative innovation, you will hear or you have heard and know about FPInnovations. The Government of Canada played a lead role in bringing three disparate research organizations together to create one forest products research institute, FPInnovations, which is now the world's largest forest projects research institute and is a public-private partnership. The Government of Canada is the largest single investor; provinces are investing, and so too is industry. The board, the management, and the research agenda all reflect that partnership between government and industry.
Second, the Government of Canada, through Natural Resources Canada, established the investments in forest industry transformation program. One of the key understandings when looking at the innovation curve is that many innovations die in what's called the valley of death. They might be great ideas and they might have opportunity, but nobody comes forward to fund that first commercial application. That's what IFIT does.
IFIT has been a remarkable success. It was funded first with $100 million and re-funded last year with another $90.4 million for the next four years. What that program is doing is de-risking up to $20 million—up to 50% of the costs—of the first commercial application. We've had a number of successes in the program that are actually first in the world.
Finally, in response to the black liquor subsidy, the Government of Canada instituted the pulp and paper green transformation program, which was substantially an investment in pulp mills that were producing black liquor. It's a $1-billion spend over three years. It was a remarkable success. I believe you'll hear that when you talk to industry.
Often, you will hear about lapses in government programs. On that $1 billion, I believe that only $1 million was lapsed. It was a remarkably successful program in getting that money out. In particular, and this speaks to the partnership with industry and the ability of government to design a program, for the American money, the $25 million, most of that went to pay corporate bondholders, many of those in Europe. They didn't go into American mills. Every penny of this program went to make Canadian mills stronger, more efficient, and more environmentally sound.
The next piece is diversifying markets overseas and growing the North American wood market. Together with provinces and industry, we established something called Canada Wood. Again, that's a partnership. The Government of Canada is a major funder. It has a presence in our major markets overseas. There are people working in Beijing, Shanghai and Tokyo, as well as a few people in Europe. Together with the Government of British Columbia we've opened an office in India. We've just hired a person in the Middle East. These are people who are working together with industry to promote Canadian wood exports in these markets.
We've had remarkable success in China. There has been a 1,400% increase in exports to China since 2007. At one point, and I think it would still be true today, there were over 20 sawmills in British Columbia that were alive, that were in business because of this, just serving the China market. At the same time the American market collapsed, the Chinese market pretty much exploded for us.
Although today's story is that growth is slowing, the exciting story about China is that the next China is China. We've only begun to scratch the surface of what's possible in China.
The other thing we're doing is working again with the industry here in Canada, with architects, and with the people who specify how buildings are built, to increase the use of wood at home. We've pretty much captured the market on residential housing. Upwards of 95% of single-family homes in Canada and North America are made of wood, but that's not true of industrial buildings. Most of those are built with steel and glass. We'd like to crack that market.
We've been working with the National Research Council to develop and expand our building codes and our fire codes to make that possible. A number of provinces have increased the building heights from four to six storeys in terms of building with wood. This year, again working with the National Research Council, we anticipate that in March 2015 the national building code will be updated to allow up to 15.
Through organizations like Canada Wood, Wood WORKS! Ontario, and Wood WORKS! B.C., and so on, we partner to work with the people who make the decisions about what to build with. We work through education, through promotion, and through codes and standards.
One of the exciting opportunities here is tall wood. You will have heard about that. Working with the Canadian Wood Council, we put out a competition about a year and half ago to build what we hoped would be the world's tallest wood building. We had a small amount of money, about $5 million, and we thought perhaps we could leverage one building. It looks as though we're going to leverage three buildings. All three of those buildings, if built today, would be the largest wooden building in the world in the modern era.
Interestingly, if you go back a thousand years, people were building with wood and they were building high with wood, but we've kind of gotten away from that.
These are exciting opportunities. It's not that we necessarily expect a lot of 30- and 40-storey buildings to be built out of wood, but if we can establish that we can build a 15- or 18-storey building out of wood, surely there's an amazingly large market for the 6-storey to 10-storey buildings right here in Ontario, in Quebec, and right across the country. The entire Midwest of the United States is littered with towns that do not have a building higher than four to six storeys. If we could get more and more of those commercial buildings built out of mass timber and engineered wood products, we believe that the opportunities for the industry would be enormous.
On the next slide you have a picture of our programs at Natural Resources Canada set against the innovation curve. What I hope you take away from this slide is the idea that like the fibres in a rope or like the links in a chain, all of these programs are working together to strengthen one another and are pulling in the same direction.
In 2015, where are we now?
Clearly economic pressures have eased. U.S. lumber demand is returning, and the U.S. is obviously still our biggest customer. U.S. housing starts are the single biggest predictor of lumber sales and growth in this sector. Global economic conditions have improved from where they were, though clearly they are not robust.
Finally, currency pressure has eased, and in fact it's going in the opposite direction. When the Canadian dollar drops like this, it is obviously great for the manufacturing sector that's exporting. There are almost windfall profits to be made for a short period of time from that.
Then of course the other factor is the drop in oil prices, which immediately decreases transportation costs for our sector, which is a very big factor for our sector. That being said, the long-term impacts of a drop in oil prices could also be negative because it could set back some of the more bio-economy pieces that the industry is looking to, partly because oil would be so cheap it would be difficult to use other sources of energy.
Today the industry is adapting. It's investing in new high-value products. It has made a big commitment to the Chinese lumber market. If you bring in some of the CEOs from the business, particularly from the solid wood side from the west coast and the Prairies, they'll tell you they're in for the long term. They understand that the Asian markets require and expect long-term relationships, and they're looking for long-term supply.
What you've also seen is that our Canadian mills, our Canadian companies, are investing in the United States. Now, up to about 14% of U.S. production capacity, mainly in the U.S. south and southeast, yellow pine, Canadian companies are investing. They are doing that for some pretty rational economic reasons. One is it's a hedge on the softwood lumber agreement with the United States. If we get into another trade war with the United States, they have bases in the United States from which they can serve that market. It's also a bit of a hedge against long-term fibre supply. Particularly in British Columbia where there has been the massive beetle kill, there is concern about the mid-term supply of timber. We've already seen in the past year some mills closing in the interior because of the lack of wood.
Finally, we've seen foreign investment in the pulp sector. This is interesting because what we're seeing here is big companies like Aditya Birla, like Paper Excellence, which is now the largest owner and producer of NBSK, northern bleached softwood kraft, in Canada with about seven mills, I believe. They bring very deep pockets. When they buy a mill, they might be buying it as a distressed asset. Their interest may not be that it be the first tier, rather that they have guaranteed supply, because they're buying and they're putting that product into their globally integrated corporations. That product is going into India to make rayon or whatever it is that they're doing, or to make pulp, but that product doesn't go onto the market. It doesn't go as market pulp. What's interesting about that is they're not as susceptible to the quarterly fluctuations of the stock market. More or less they couldn't care less what's happening in the stock market. What they want is long-term supply of fibre to feed their operations. For the folks living in those communities that have had firms reopen as a result of this foreign investment, they're pretty happy. They have jobs, and they are fairly secure jobs.
On the next slide, in sum, the forest sector overall, the big story is that it's profitable. Investment is starting to come back. The sentiment is positive. There have been 11 straight quarters of positive earnings, and the 10 largest publicly traded companies have positive profits.
That's the big picture.
In particular, again talking about sectors, lumber and wood panels are very strong. If you're in market pulp, tissue and packaging, at the very least you're steady. There's some positive news out there as well, because as countries get richer, they use more tissue, so pulp has a role there.
I'll move on to the next slide. But it's not all positive. Paper demand we anticipate will never come back. The e-readers and electronic media are replacing paper in the long term. There will always be a niche market for paper, but not the way it was historically. That matters to central and eastern Canada, to Quebec and Ontario in particular, because that is the base of the world's paper production historically.
Employment is still down. Those mills are running; those mills are highly efficient, but companies don't start hiring until they're confident about the future, and so employment is not where we would hope it to be. Looking forward, that's an area where we would like to see growth. Governments continue to work on opening up new markets, new end uses. Wood has phytosanitary issues. It's a natural product. There are constantly trade irritants and non-tariff trade barriers being raised that we need to work on.
The country is not homogenous. It gives you a quick sense of the size of the various sectors across the country and different issues. In the west, there are concerns about mountain pine beetle and possible wood shortages in the medium term post-2020. In the east, there is the spruce budworm outbreak in Quebec, and possibly threatening New Brunswick. Then throughout there are possible threats from climate change, which include both pests and fire.
Quickly, I would highlight three strategic priorities for the future.
Strategic innovation: I've talked a lot of about it. This is really where the sector is putting a lot of its focus and where the Government of Canada in particular is bringing its expertise and its money to the table.
Jobs and economic opportunities: 80% of first nations communities are in forests. There's an enormous opportunity to increase aboriginal participation in the forest sector, even though the forest sector would say that it is already the largest employer of first nations, though I think the mining sector says that as well. There are different regional economic challenges. We need to worry about the future health of the forest, and we have to find uses for some of that salvaged wood, such as wood from the beetle kill, which we've done a pretty good job of. Now emerging in Quebec and the east, there is wood from the spruce budworm kill.
Finally, there is trade and expanding markets. The softwood lumber agreement expires in October. We need to continue to focus on China. We've just signed a free trade agreement with Korea. There's opportunity there. We have to pay attention to trade irritants. We think there's enormous opportunity to increase into non-traditional uses in buildings in North America. While I think the industry thought it had resolved the environmental issue a few years ago with the Canadian Boreal Forest Agreement, which has been a huge boon to the industry, the issues of environmental sustainability and public confidence in the sector are returning. You'll see that in the media. That is increasingly a concern for the industry.
Finally, in summary, the sector is important and it continues to be important. It will be important going forward. It has been rebounding and growing since the last time this committee looked at it. It's transforming itself with new products and new markets. Natural Resources Canada is playing an important role in that transformation.
Thank you, Mr. Chair.
