BUSINESS

Chipping away at the future

A shortage of raw materials puts pressure on British Columbia’s forest policy

ANDREW WILLIS February 27 1995
BUSINESS

Chipping away at the future

A shortage of raw materials puts pressure on British Columbia’s forest policy

ANDREW WILLIS February 27 1995

Chipping away at the future

A shortage of raw materials puts pressure on British Columbia’s forest policy

When Peter Bentley kicked off a hostile $650-million takeover bid for rival Slocan Forest Products Ltd. last December, the patrician chief executive of Vancouver-based Canfor Corp. had just one thing on his mind—wood chips. After years as the leftovers of the logging industry, surging demand for pulp and paper, changing environmental regulations and new technology mean that wood chips are suddenly a hot commodity: their price has shot to $140 for a standard 1,080-kg load from $65 just a year ago. And Bentley, who runs the $1.2-billion forest products business that his family founded after leaving Austria when the Nazis invaded in 1938, says that his aggressive pursuit of Slocan was rooted in Canfor’s basic need for “self-sufficiency and control of wood-chip supply.” In fact, his company temporarily idled two central B.C. pulp mills for 15 days last fall because of a lack of the raw material. Although Bentley eventually abandoned

his two-month campaign to win Slocan in early February, his quest for a new supply of wood chips—the matchbook-sized ovendried chunks of British Columbia forest that form the raw material for paper and newsprint—has put the political spotlight on a volatile mix of issues including logging rights and environmental concerns. Above all, it has raised tough new questions about the future of British Columbia’s $14.4-billion forestry sector.

Acquiring Slocan would have transformed Canfor into one of the world’s three largest forest products companies and added access to enough new trees to feed three pulp mills each year. But that prospect drew an unfavorable response from B.C. Forests Minister Andrew Petter, who startled the industry by announcing, midway through the Canfor-Slocan takeover battle, that he had “difficulty” with the terms of the proposed deal. Specifically, he questioned whether Slocan’s licence to cut trees would be transferable un-

der existing B.C. law, which allows logging permits to be revoked after a change of corporate ownership. “It would have been irresponsible to not give [Slocan’s] shareholders a framework of government policy,” Petter told Maclean’s. He adds that Canfor’s victory would have had “a domino effect as other companies reacted to what they saw taking place with wood-chip supply.”

Petter’s concern about a frantic scramble for B.C. wood-chip assets, however, is wellfounded. For one thing, Slocan managed to fend off Canfor’s offer only by trading on its highly desirable wood-chip stocks. In exchange for a 10-year supply of wood chips for its Kamloops, B.C., pulp mill, Weyerhaeuser Canada Ltd. extended an $80-million loan to Slocan to buy back some of its own shares, at premium prices. And even before the curtain dropped on that corporate drama, a group of primarily U.S. investors—starved for wood chips to supply their newsprint mill on Vancouver Island—formalized a $44-million merger offer to Orenda Forest Products Ltd.

According to Mike MacCallum, a Vancouver-based partner at Price Waterhouse, British Columbia’s booming pulp and paper industry may be as much as 10 per cent short of the wood-chip supply needed to operate at full capacity in 1995. In part, that shortage reflects changes in technology and industry operating practices. Until recently, sawmill operators would discard the wood left over when planks and two-by-fours were cut and feed it into a machine that chewed the wood scrap into chips. But over the past two years, the mills have started forming these trimmed scraps into planks for such lucrative value-added products as no-warp door frames.

Wood-chip supply is also being squeezed by changes in forest management and government regulation of the industry. Petter’s department is currently reviewing land use and forest industry practices that seek to balance the interests and agendas of business, environmental and community lobbyists; what he hopes to produce in coming months is a framework for sustainable harvest of British Columbia’s forests, along with protection of sensitive wilderness areas. Those efforts have taken on heightened political significance in a year when the province’s New Democratic government faces an election.

Whatever the conclusions, Petter says that some decline in the number of trees cut in British Columbia is inevitable as the province moves to a sustainable and credible forest management policy. Estimates on how much the harvest will ultimately be reduced range from government projections of a fiveper-cent decline to worst-case industry scenarios of a 15-per-cent cutback. The minister adds that the relationships between loggers and environmentalists are now so fractious that “we were bogged down to the point where access to logging new areas was more theoretical than real.”

But whatever policy changes lie ahead, Petter’s intervention in Canfor’s bid for Slo-

can has sent a chilling message to an industry that is just recovering from the recessionFor his part, Bentley calls Petter’s comments about the Canfor bid “a serious intervention into the capital markets.” And he blames the minister’s “foolish statements” for its costly defeat. Certainly, the industry has been buoyed by demand for lumber from home builders in the United States and Japan and by a steady increase in newsprint prices. Over the past 12 months, newsprint prices have climbed by 112 per cent; they are expected to hit $1,158 a ton on March 1.

After collectively losing $869 million in 1991, that cyclical turn in fortunes is welcome. B.C. forest companies posted $520 million in profits on $14.4 billion in sales in 1993, and MacCallum is predicting $1 billion in profits for 1994 on $16.5 billion in revenues. The stock market already reflects expectations of strong financial results: the forestry index of the Toronto Stock Exchange is up 20 per cent over the past 12 months, compared with a five-per-cent rise in the overall TSE index of 300 Canadian companies.

Now, because of the uncertain political climate in the province, observers say that the friendly merger between Orenda and the U.S. investors syndicate—as well as other possible deals—may unravel. The syndicate wanted Orenda to supply their six-yearold newsprint mill at Gold River on Vancou-

ver Island, a mill that has been shut for two years, partly for lack of wood chips. But, as

Petter made clear to Canfor, the logging licences may not automatically be transferred if ownership changes. John Johnson, a forest products analyst with Richardson Greenshields of Canada Ltd. in Vancouver, says: “Ultimately, the province owns the woods on behalf of the people of British Columbia, and

they’re going to balance off a number of interests. They’ve just made us much more aware of this by stepping into the CanforSlocan takeover.”

Furthermore, tougher provincial regulation

could jeopardize jobs, a consequence that is politically unacceptable in an election year. Currently, British Columbia’s forest industry is the province’s largest employer, supporting 92,000 workers. That is already down from the pre-recession level of 100,000 jobs in 1989. And Scott Alexander, spokesman for MacMillan Bloedel Ltd., British Columbia’s largest forestry company, says: “We see the land-use studies having a far more significant impact than the government anticipates.”

Last summer, a provincial commission recommended that the government create a preserve of central B.C. forest— about half the size of Cape Breton Island—as part of a plan to balance environmental and business needs. Critics protested that this plan would mean the loss of up to 855 forestry jobs. £ But provincial officials coun| tered that new jobs would be z created through a $2-billion re“ training program know as the Forest Renewal Plan.

Retraining workers and salvaging jobs, however, will not improve the supply of wood chips. In the near future, MacCallum says that two B.C. pulp and paper mills, one jointly controlled by Japan’s Daishowa Paper Manufacturing Corp. and West Fraser Timber Ltd. and another owned by Stone Container Corp. of Chicago, are more vulnerable to supply problems because they buy wood chips on the open market, rather than harvesting their own forests. Other industry analysts note that rising wood-chip prices will inevitably squeeze pulp and paper profit margins, putting older, less efficient mills out of business.

As a result of the supply squeeze, Richardson Greenshield’s Johnson says the forest industry “is now doing what the mining industry did two decades ago: thinking globally.” Increasingly, Canadian lumber companies are beginning to look abroad for the logs they need to feed their mills. MacMillan Bloedel recently won an auction of eight huge barge loads of Alaskan logs, beating out bids from seven other mills and securing enough wood chips to keep a mill running for only about a month.

Meanwhile, Canfor’s Bentley is finding new sources of wood chips. He’s using new technology to scour his own sawmills for additional wood scraps and signing up supply from Ainsworth Lumber Co. Ltd. “Our mills will run at capacity,” Bentley says. But he adds that the B.C. government’s actions have left him with “a very deep sense of outrage. I felt that [Slocan takeover] deal was an opportunity that very seldom comes along.” But as the competition for wood-chip supply heats up, the search for similar opportunities may soon intensify.

ANDREW WILLIS