Thank you, right honourable chairman and honourable members of Parliament.
As you may know, Domtar is a publicly traded company with global operations that directly employ approximately 10,000 persons and generate annual revenues of over $5 billion. We operate under two divisions, both tied to the forest products industry: the personal care division and the pulp and paper division. I represent the pulp and paper division.
This division has a primary manufacturing system which is exclusively based in North America. It consists of 13 pulp and paper mills across Canada and the United States. Four of these are in Canada and nine of them are in the United States. Our system in North America produces over 4.5 million tons of pulp per year and over 3.5 million tons of commodity and specialty paper grades. Domtar is North America's largest supplier of uncoated free sheet and is one of its largest suppliers of specialty paper grades in market pulp.
Again, as you may know our origins lie deep in Canada, reaching back to the 19th century, and we continue to have a major focus in Canada. When everything is said and done, approximately 25% of Domtar's manufacturing footprint is based in Canada, to this day. In all, Domtar's Canadian pulp and paper operations directly employ over 2,500 individuals and produce and market over 1.4 million tons of pulp and over 750,000 tons of paper annually.
I'd like to discuss the need and motivation for Domtar's intense interest in renewal. There have been two macroeconomic themes that we've been working under, as has the whole forest products industry, but particularly those of us who are connected to communication grade papers. These two themes are secular decline in core product demand and international competitive forces. Specifically, we in North America, in general, and Canada, in particular, operate under structural cost disadvantages. This is especially prevalent in market hardwood pulp grades and very relevant when it comes to fine paper and uncoated free sheet.
With respect to the uncoated free sheet, we again have been operating with a long-term decline of between 2% to 3% in our core product every year for the last 10 years. Notwithstanding strong operating performance since the formation of the new Domtar in 2006, this secular decline has taken its toll. Without going into too much detail, the combination of these macroeconomic factors has resulted in significant industry-wide pulp and paper capacity removal and re-purposing. In several cases, it has resulted in total facility closures. We at Domtar have not been immune to that. We have closed numerous facilities both in Canada and the United States and have been very busy in the process of re-purposing them to other grades.
Importantly, at least to those of us in the R and D community, the decline in manufacturing capacity has also been accompanied by a marked decline in industry's internal R and D. In spite of these challenges, and in some cases significant setbacks, Domtar perceives great opportunity for renewal through innovation and we are committed to developing and maintaining a world-leading role in fibre-based innovation. Specifically, we feel our opportunity lies in leveraging our core competencies, assets, and product offerings to allow us to develop a portfolio of new, valued-added fibre-based products and businesses.
This core competency we refer to is in the operation and management of our forest-based supply chain and the primary manufacturing system for conversion and valorization of over 12 million dry tons of wood per year. A fact that I'd like to really underline is that while we bring in 12 million dry tons of wood per year—I mention that because wood comes in wet—we actually process 24 million tons of wood a year.
Less than 40% of the solid wood material is used to produce pulp and paper products, which we take to market. The rest of it, over 55%, is burned for internal process fuel. This is not waste. It has value, but it has a very low value. Relative to the products we bring to market, the value of the burned or combusted material is typically 5% to 10%.
Our approach in the development of this renewal is to focus on the integrated biorefinery. Here the term “integration” refers to integration with our existing supply chain and primary conversion systems, that is, our pulp mills and our paper mills. The term “biorefinery” refers to a manufacturing system capable of producing a portfolio of products, not just fibre and paper products that we believe will be there over the long run, but a portfolio of products that maximizes overall value from the wood feedstock.
Before concluding, I'd like to hit on some committee themes, namely sector and market diversification, including plans, strategies, and best practices in that regard.
Sector and market diversification is something that is a daily part of life at Domtar and other mill manufacturing companies. Every one of our 13 mills has undergone significant repurposing in the last 10 years. The transition to value-added specialty paper and specialty pulp grades in order to re-purpose commodity production facilities will be a major and ongoing theme going into the future.
Across our system we are also working on the development of value-added co-products and their applications and markets. Our program is organized along five product platforms: advanced fibres and fibre derivatives; lignin and lignin derivatives; convertible saccharides, or what we often call the sugar platform; thermal chemical conversion products, such as pyrolysis and gasification products, which are generally for fuel purposes; and a smaller platform, which is volatiles, saponifiables, and other extractives and their derivatives.
The key elements of our strategy and practices are as follows.
We employ an open innovation approach and actively develop collaborative partnerships that include end users, technology suppliers, universities and research institutions, and government agencies and sponsors.
We seek to position ourselves as an enabler of choice in order to attract best-in-class partners and gain competitive advantage. The way we make ourselves the preferred enabler is by being quick and ready to engage: we are open to discussions with all types of technology providers and in many cases start-up companies; we are quick to make decisions on projects; and we have a reputation for effective innovation leadership and project execution.
Another key element of our approach is that we identify and leverage site-specific synergies within our existing manufacturing base. Having a large and diverse manufacturing system and a deep pool of talent at individual sites facilitates the identification of a good fit, and a good fit is really important in many of these technology demonstration development projects, in order to mitigate risk and cost and ensure success.
Finally, we engage through several small bets, although the bets aren't that small, depending on your perspective. The basic idea is to operate with parallel efforts, which limit risk and exposure, but to move quickly to create platforms that we can launch major new initiatives from and build up organically from there.
There are two examples of this that I'd like to underline, which were recent and I believe are world-leading and transformative in their nature.
The first is the NCC commercial demonstration plant at our Windsor, Quebec mill, the first of its kind in the world. It was built and commissioned in partnership with FPInnovations to form the CelluForce JD. This was built with the strong support of the NRCan IFIT program and also of the Quebec provincial government.
A second example I'd like to point out is our lignin extraction project at our Plymouth, North Carolina mill. This was supported by the United States Department of Energy and the USDA BRDI program in collaboration with multiple partners. If we include our customers, the number of partners and collaborators we have in that area exceeds 100.
Relative to strategic innovation and improving existing products, the continued redeployment of our assets towards new specialty paper and specialty pulp grades will, as I mentioned before, be a major theme going forward.
A good example of a strategic innovation that commenced with improvement of existing products would be our recent development of a proprietary and potentially transformative specialty fibre. Vertical integration into existing products de-risks and accelerates commercialization. In this case it created a path to market for this important technology, which in turn has created a platform for the development and demonstration of this material in new external markets. Specialty pulps are the external markets I'm referring to. This is a soon-to-be announced demonstration project that is sponsored in part, again, by NRCan's IFIT program.
Developing high-value products is a fundamental objective of our program and something we occupy ourselves with daily. Our approach is to start by developing higher-value products from the fibres we already produce but also from the large component of wood feedstock, which I mentioned earlier, that we are presently burning. Over 50% of all the woody biomass material, we burn for internal process fuel.
Another example of this is the extraction and purification of lignin from black liquor. It is the first of several valorization steps, and it creates for us a platform for future value-added derivatives of this lignin.
The development of higher-value derivatives and end uses is the ultimate objective and a key success factor here. It will depend very much on effective collaboration with technology suppliers and end users of these derivative products.
A key challenge that we have is in identifying the appropriate hand-off stage and mechanism. When do we stop upgrading the material and hand it over to a customer who will take it from there?
So far as better use of forest residuals is concerned, in most cases pulp mills already use residuals as feedstock for pulp and biomass boiler fuel. As lignin extraction and valorization takes hold—and we believe it will be a several-million-ton-per-year market within a five to ten-year timeframe, depending on how things unfold—the need for replacement of this internal fuel with relatively lower-value biomass, or what we used to call hog fuel, will increase. That's the first line of sight for better use of forest residuals.
Perhaps more importantly, for what we refer to as our sugar platform or saccharide platform our approach will be to develop it using low-quality forest residuals that are presently unsuitable for pulping operations. A good starting point for this would be the material that we routinely reject from our pulp mills through the chip-size screening process. Every pulp mill in Canada—and in the world, for that matter—will reject about 5% of all the wood that comes to it and burn it for low-valued fuel.
The last theme I'd like to speak to is continued development of the innovation system. This is something that is very close to my heart.
One thing I'd like to point out is that while slightly more than 25% of Domtar's footprint resides in Canada, 50% to 75% of our innovative technology development and innovation activity occurs in Canada. So we do a disproportionately large amount of R and D, commercial demonstration, and market development in Canada.
We don't do this for sentimental reasons. We do it because what we find is that strategic innovation in Canada provides us better access to and availability of requisite innovation systems and of resources, including people and research facilities, and better access to infrastructures, public policy, and sponsorship programs. Domtar supports, has been supported by, and makes extensive use of both provincial and federal programs for activities across the innovation spectrum, ranging all the way from fundamental research at universities through to proof of concept and commercial development and demonstration.
Examples of the types of programs that we have leveraged on the federal level include NSERC Engage and the NSERC CRD for the initiation and support of university collaborations; partnerships with federal laboratories, such as NRC and CANMET; partnerships with federally sponsored research consortia and institutions, such as FPInnovations; programs in support of forest industry renewal, such as NRCan's PPGTP and IFIT.
Allow me to say that in my career the PPGTP program is probably the single most successful program and implementation of policy I've ever been associated with, in terms of being impactful and quick to have impact.
There are also, of course, programs in support of strategic bio-based technology development, such as SDTC, and programs in support of recruitment of highly qualified technical professionals—formerly the NSERC industrial postdoc program, presently MITACS. It is a burning need that we have, to bring young technical people of high skill into our industry. This is one area in which Canada has an extreme advantage over the environment in the United States.
We believe this trend of Canadian-based leadership in Domtar's innovation will continue for the foreseeable future due to the pending announcement of two exciting, new commercial demonstration initiatives, both of which will be sponsored by the NRCan IFIT program, namely the first project, which is the manufacture of ultra-high-performance specialty pulps at our Dryden, Ontario mill, and the second project, which would see the conversion of isolated lignin for use in thermal plastic films, which will happen at the Windsor, Quebec mill in partnership with NRC.
With that, I'd like to conclude.