Production costs, changing markets hit competitiveness

Ontario's $19-billion forest industry is still on life support despite the provincial government's recent $330-million aid package.

"The Ontario forest industry operates in one of the highest-cost jurisdictions in the world," says Jamie Lim, president of the Ontario Forest Industries Association (OFIA). "The government's package hasn't changed that."

The OFIA represents 29 Ontario forestry companies managing 90 per cent of the wood fibre on Ontario's Crown lands.

Since January 2005, 10 Ontario paper and wood production mills have been shut down with the loss of hundreds of jobs. There have been more than 2,300 permanent job losses in the Ontario forest industry in the last three years, according to the OFIA.

In late September, the provincial government announced a five-year $330-million aid package to help the troubled industry respond to changing global markets, increasing competition from low-cost countries such as Russia and China, escalating fuel and electricity costs, and a rising Canadian dollar.

The plan includes a Forest Sector Prosperity Fund of $150 million over three years to encourage forestry companies to expand and modernize. The private sector will have to pay most of the costs of the projects, however.

"We basically think the $150 million could lever up to $1.2 billion in new investment," provincial Natural Resources Minister Dave Ramsay said when he made the announcement in Thunder Bay.

The forestry loan program is similar to the provincial government's $500-million package for the auto sector, which has generated billions in new investments from Ford and General Motors.

Premier Dalton McGuinty has admitted the package will not prevent more mill closures and layoffs, but says it is aimed at helping the province's forest companies be more competitive. "It's designed to help put the industry on a stronger footing going forward. It is not designed, because it would be impossible to do so, to protect all existing jobs," McGuinty says.

In June, the government announced it would provide up to $350 million in loan guarantees to stimulate investment.

Ontario's forest industry, the second largest after auto manufacturing, has annual sales of about $19 billion and provides direct and indirect employment for about 250,000 people, the OFIA says. It pays $2.5 billion annually in provincial, municipal and federal taxes and provincial stumpage fees.

Higher delivered wood costs and increasing energy costs are having a significant impact on forest products producers in Eastern Canada, where costs are 60 per cent higher than in Western Canada, according to Natural Resources Canada. The recent elimination of price protection on electricity rates in Ontario has boosted prices by more than 30 per cent.

The industry and dozens of Northern Ontario communities now hope an appeal to the government to reduce energy costs in the north may stem the tide of mill closures.

A final report in May from the Minister's Council on Forest Sector Competitiveness said the Ontario forest industry "is in crisis" and "urgent action is required to prevent predictable and irreversible consequences for communities, business and workers.”

The 17-member council was created last November by Ramsay.

The council report warns of the imminent closure of 12 mills in Northern Ontario and the loss of 7,500 direct jobs and more than 20,000 indirect jobs in northern and southern Ontario.

The pace of mill closures has been steady. In July, Abitibi Consolidated Inc. announced the permanent closure of one newsprint machine and the shutdown for an indefinite period of another. In September, Norampac Inc. announced the closure of its 150,000-tonne containerboard facility in Red Rock and the loss of up to 175 jobs.

On the eve of the announcement of the Ontario government's new aid package, Uniboard Canada Inc. announced the permanent closure of its New Liskeard operation, which will eliminate 73 jobs.

The plant's manufacturing unit costs were higher than the industry average, the company said in a news release.

The cost to deliver cut timber from the forest to mills in Ontario is $55 US per cubic metre, compared to $36 in Manitoba and $44 in B.C., Lim says. "That's a $20 gap."

The OFIA did not expect the government's package to close the $20 gap in one step, Lim says, but it was expecting it to bring costs below $50. Under the announced program, costs "dropped by a dollar," she adds.

For the Ontario forest industry to begin to recover, remain competitive and keep investment in the province, the cost of delivered wood must be reduced significantly, Lim says. "There may be some firms out there that can access the prosperity fund, but you still have at the end of the day the highest wood costs."

The OFIA was not alone in saying the government's aid package failed to address the situation.

"We're not happy with what they've done," says Norman Rivard, chair of the United Steelworkers of America IWA Council, which wanted timber-cutting rights tied to the northern communities and a review of mill closures.

"The package may help the companies. It doesn't do anything to help the Northern Ontario communities and keep jobs in the communities."

Ontario's Communications, Energy and Paperworkers Union called the government's package "pathetically anemic" and says it will do nothing to help the troubled industry.

Greenstone Mayor Michael Power, who is also head of the Northwestern Ontario Municipal Association, says the government "fell far short on reducing delivered wood costs," although the Prosperity Fund may help Greenstone get a proposed $300-million strand board plant.

"We are anxious to see the details of the minister's prosperity fund to learn what, if any, new opportunities might exist for this proposed plant. My goal for Greenstone is that we get this investment."

Greenstone is about 215 kilometres northeast of Thunder Bay.

The government's announcement did not include the 50-per-cent reduction in provincial fuel-tax credit for hauling wood from the forest to the mills, or return to the provincial government financial responsibility for primary road construction and maintenance, as the minister's council report had recommended.

"The government chose not to respond to that (the fuel-tax credit)," OFIA's Lim says. "It was really critical these be addressed because they go directly to reducing delivered wood costs.

"Plants in Ontario are closing not because the industry isn't modernized, but because it operates in one of the highest-cost jurisdictions in the world," Lim says. "Forest companies have already invested hundreds of millions of dollars in modernizing their plants in Northern Ontario."

Weyerhaeuser invested $350 million in a new plant in Kenora in 2002. Bowater Canadian Forest Products in the past few years invested hundreds of millions of dollars in Thunder Bay to build one of the world's most modern sawmills, Lim says.

"Companies seek out low-cost jurisdictions to operate in," Lim says. "That's just what they do."

Lim now hopes there will be an announcement later this month from the government on what it plans to do about high energy costs. "That's the other part of the puzzle."

The industry is asking the government to allow the creation of new supplies of lower-cost energy. The annual electricity costs for the Ontario forest industry are about $500 million and represent up to one-third of operating costs, the council's report says.

Manufacturing plants in Manitoba and Quebec have electricity costs 50 per cent less and 20 per cent less, respectively, according to the Association of Major Power Consumers of Ontario.

The Ontario mining industry has also asked the government to lower the price of electricity because it makes its products uncompetitive.

"I am disappointed, but not discouraged. This government certainly has shown willingness to listen and work with us, more than any other previous government in 20 years," Lim says.

"For the first time, the forest industry is on the radar screen at Queen's Park," she says.

- With files from The Canadian Pres

(Charles Wyatt can be reached at