At the Chateau Kap bar in downtown Kapuskasing, Ont., workers from the nearby Spruce Falls Paper and Power Co. routinely gather after their eight-hour shifts to drink beer and talk over the day’s events. But as summer approaches this year, blackflies and baseball are no longer the dominant topics. Instead, the Spruce Falls workers are anxiously awaiting a decision about the future of the mill, which for generations has been the town’s largest employer. The company’s owners, KimberlyClark Corp. of Dallas and the New York Times Co., plan to shut down most of its operations by November, eliminating all but 270 of 1,450 jobs, unless an employee-led group puts together a deal to take it over. The uncertainty

has led many residents of Kapuskasing, a town of 12,000 people 700 km north of Toronto, to consider moving to other parts of the country. “When I started at the mill 16 years ago, everybody worked there,” says Alex Mair, 34, a pipe fitter who is considering a move to Vancouver Island with his wife and two children. “We used to call the company ‘Uncle Spruce,’ but not anymore.”

Unfortunately for Mair and his co-workers, the rest of Canada’s forest products industry is not in any better shape. From British Columbia to Newfoundland, paper mills are closing down or curtailing production, lumber exports are weak, and forestry company balance sheets are awash in red ink. The forestry sector—Canada’s largest industry in terms of revenues—is under siege from the combined pressures of the worldwide economic slowdown, high interest rates and a strong Canadian dollar, which makes Canadian goods less competitive on global markets. As a result, many large forestry companies have slashed their workforces and cut back on plans to invest in new mills and equipment. In future, some forestry executives predict, most of their investments will be in operations outside Canada, where both labor costs and raw timber prices are often lower.

The downturn in the forestry sector poses a serious threat to Canada’s economy. According to the federal government, the industry generates 3.4 per cent of Canada’s gross domestic product and provides 880,000 jobs, equivalent to seven per cent of the labor force. In 1989, the most recent year for which figures are


available, forestry operations contributed $19.5 billion to Canada’s balance of trade—more than the combined contributions of energy, mining, fishing and agriculture. “The forest products industry is extremely important,” says Allan Yarish, an economist with the Royal Bank in Montreal. “It’s an industry in which Canada has traditionally had a strong competitive position, but recently that position has been sharply eroded.”

The downturn is particularly sharp in Quebec, Ontario and the Atlantic provinces, where many of the large pulp-and-paper mills date from the early part of the century. Although most have been upgraded since then, the industry is still relatively inefficient by world standards. By contrast, British Columbia’s forestry industry spent heavily during the past decade to modernize its operations. Battered by a prolonged economic slump in Western Canada, B.C. lumber and pulp companies also reduced their costs during the 1980s by cutting their workforces.

In the current recession, however, even the most efficient forestry com-

panies are finding it hard to make money. In the first three months of

1991, Vancouver-based MacMillan Bloedel Ltd., Canada’s third-largest forestry company in terms of sales, had net profits of $3.8 million on revenues of $678 million. That compared with profits of $30 million on revenues of $781 million in the same period a year earlier. Another major Vancouver-based company, Canfor Corp., lost $10.7 million on revenues of $214 million in the first quarter of 1991. Noranda Forest Inc. of Toronto, Canada’s largest forestry company, lost $38 million on sales

of $1 billion in the first quarter of the year.

Like many of its rivals, Noranda Forest blamed its losses on reduced sales of pulp, paper and building products caused by the North American recession. But the industry’s problems run deeper than that. Adam Zimmerman, Noranda Forest’s outspoken chairman, says that the current high level of the Canadian dollar relative to the U.S. currency is costing his company about $150 million a year in export revenues. “There is a major refinement of this industry ahead, ” Zimmerman added in an interview. “There are a lot of small mills the industry can just do without.”

Zimmerman and other forestry executives also complain that the cost of doing business in Canada is higher than in many other countries. Raw timber, the price of which in most cases is set by provincial governments—which own the forests and lease cutting rights to the private sector—is currently about 50 per cent more expensive in Canada than in the southern United States, where companies are allowed to own and manage their own forests. In addition, Canadian workers, most of whom are unionized, earn almost 50 per cent more than their unorganized counterparts in the southern United States, according to Stephen Atkinson, an industry analyst with Deacon, Barclays de Zoete Wedd Inc. in Montreal.

Responding to those pressures, many companies have undertaken wholesale reviews of their battered operations. Abitibi-Price Inc. of Toronto, one of the largest North American manufacturers of newsprint, declared in its 1990 annual report that the forest products industry was “going through a painful period of transition which will transform it permanently.” In line with that assessment, Abitibi-Price has shut down two paper mills in Quebec and Newfoundland and a fine-paper plant in Georgetown, Ont. Last week, it also announced plans to sell a newsprint mill in Pine Falls, Man.

Ominously, the focus of

several major compames appears to be shifting to operations in other countries. Senior executives at AbitibiPrice, which already has two joint-venture pulp mills in the southern United States and another in the works in Scotland, declared last month that, in future, they will construct mills only in regions of the world where costs are lower than in Canada.

Another company that is looking abroad for opportunities is Noranda Forest, part of Peter and Edward Bronfman’s corporate empire. The company already has mills in five U.S. states, as well as interests in a waver-board plant in Scotland and a finepaper company in the Netherlands. According to Zimmerman, the company’s

Canadian operations have a cost disadvantage of about $100 per ton compared with competitors in the southern United States. “Sheer logic would drive us to get out of Canada altogether if we could,” he added.

In the rush to become more competitive, most forestry companies are slashing spending wherever possible. In some cases, they are also shifting away from low-margin items like raw pulp to more value-added, specialty products such as the paper used in telephone directories. At Domtar Inc. in Montreal, the goal is to reduce overhead costs by $210 million, to $2 billion, by 1993. To achieve that objective, management has eliminated 1,800 jobs and sharply curtailed spending on research and development. Says Domtar’s corporate treasurer, Halford Wilson: “Usually, you cut costs by upgrading equipment and taking similar steps. This time, it means rationalizing product lines, plants and people.”

One area in which forestry companies are unable to cut back is on spending to meet new environmental standards. Between 1984 and 1994, the federal government predicts, the Canadian forest products industry will pour $5 billion into upgrading their operations to conform to new federal and provincial guidelines for the discharge of chemical wastes from the pulp-and-paper manufacturing process. “It’s a worthy objective, and we applaud it,” says Robert Lawrie, senior vice-president at Abitibi-Price. “But we are talking about a major investment that generates no return of revenue or income.”

Cash-strapped forestry companies are also proceeding with the construction of de-inking plants that allow the use of recycled newsprint.

Several U.S. states have imposed minimum standards for the amount of recycled content in paper used in their jurisdictions. To retain access to that market, Canadian companies are investing in costly new plants, even though newsprint that meets the new standards does not command a higher price.

To make matters worse, the industry will soon be unable to obtain sufficient supplies of used paper in Canada to meet the growing U.S.—and Canadian—demand for recycled newsprint. That is because Canada currently exports 88 per cent of its newsprint production

and does not generate enough wastepaper domestically tó supply the new recycling installations.

Because of the wide variety of cost pressures, Lawrie says, Abitibi-Price is working to remain flexible in its plans and responsive to industry changes. “The saying around here is that we have to stay loose in the saddle to make it through turbulent times,” he declared.

In Kapuskasing, the challenge is even more pressing. Last month, the owners of the Spruce Falls mill gave its workers a June 30 deadline to develop a plan to assume control of the paper plant. But as a precondition, the company has insisted that the Ontario government carry out a planned $ 134-million purchase of the company’s nearby hydroelectric power plant. Time-consuming environmental reviews have delayed that deal. “The mood at > the mill is split,” says Rene

Mick, 33, a pipe fitter who has worked at the plant for 12 years. “Some people are actively conducting job searches, but most are waiting to see.” Still, even if the employee buyout succeeds, the Spruce Falls workers will face a formidable survival challenge in an environment that is growing increasingly unfriendly.