Business

Worried in the woods

JENNIFER HUNTER December 15 1997
Business

Worried in the woods

JENNIFER HUNTER December 15 1997

Worried in the woods

Business

JENNIFER HUNTER

Tom Stephens, the new boss at forest giant MacMillan Bloedel Ltd. in Vancouver, is one tough guy. Two months into the job, he is already lashing the troops with some gritty remarks about the company’s abysmal performance—it lost $17 million in the first nine months of 1997. “Collectively we’re seen as losers,” the chief executive officer told his company’s in-house journal, “and that includes the 23rd floor at head office. We’re worth more dead than alive. Someone could get more value breaking the company up and selling the assets than they could from continuing to run it as it is.” In fact, at week’s end there were reports that Stephens was on the verge of selling MacBlo’s paper business to cash-rich Fletcher Challenge Canada Ltd. for $1 billion.

Other British Columbia forest companies have similar problems. The business of chopping down trees in the B.C. woods is, to put it politely, a mess. Sawmills are being shuttered. Workers are losing their jobs. Pulp and paper production is being strangled by the Asian currency crisis. Companies are going bankrupt. The province’s most crucial industry and one of Canada’s largest moneymakers— one that generated exports of $12.3 billion in 1996—is being chopped down by economic forces coming from all directions. “This is the worst I’ve seen it in over 20 years,” says Charles Widman, a

Vancouver-based forest industry analyst. ‘What’s happening here is very serious. I feel sick about it.”

Some of the problems besetting the business are recent: the collapse of the all-important Japanese housing market, the limping Southeast Asian economies. Some are more deeply rooted, including high provincial taxes, costly environmental rules, land being set aside for parks, increasing competition from Scandinavian and Baltic countries, Indian land claims and overcutting. “It’s a complicated situation,” sighs Ken Higginbotham, vice-president of coastal logging for Canfor Corp., one of Canada’s largest forestry companies.

For starters, the industry says it has become ridiculously expensive to saw down B.C. softwood. Hefty stumpage fees—the taxes file B.C. government charges forest companies to log wood on Crown land— combined with the expense of cutting and removing trees mean that it costs $90 per cubic metre to harvest wood in the B.C. interior. That compares with Quebec, the country’s second-biggest exporter, at $45 a cubic metre. Then there is the whammy of quotas imposed by the Canada-U.S. softwood lumber agreement and the slump in Japanese housing starts, which are down 22 per cent from September, 1996. Sawmills on the B.C. coast normally sell 51 per cent of their wood to Japan and are feeling the effects. In the background is the nagging question of Indian land claims. Last month, the B.C. Supreme Court ruled that if natives manage to prove they have legal rights to the land, the province cannot permit companies to log it The forest industry’s woes are visible in Vancouver, on the banks of the Fraser River, where Canfor is planning to close its century-old Eburne sawmill by next March. Two hundred and seventeen employees will lose their jobs. Says Jake Whitehead, the mill’s general manager: “For a lot of these men, this is the only place they’ve ever worked.” Among them is 41-year-old Perry Kainth, who started at the Eburne mill in 1974 when he was 16. “There are people who can’t speak proper English or read and write,” says Kainth. ‘What are they going to do? Do you think there is a market out there for them?” Ray Larsen, 54, has worked at Eburne for 33 years. “Basically they are throwing us on the trash heap,” he says. “Nobody is going to hire you when you’re 54.”

B.C.'s troubled forest industry is struggling to stay afloat

Whitehead, however, believes Canfor had no choice. In the past he says, British Columbia was able to sell wood around the world because it was cheap. ‘Well, we’re not cheap any more.

We’ve become the most expensive producer in the world.” Canfor chairman Peter Bentley says there are too many mills in British Columbia and not enough lumber. The forests on the coast have been overcut. That is a point environmentalists have been making for years and an admission forest analyst John Duncanson finds remarkable. “Finally, somebody in the industry has had the guts to stand up and say publicly that we’ve overcut and we’re paying the price now.”

Both Duncanson and analyst Widman predict that more sawmills will close over the next year. Widman expects that the number of laidoff workers in the lumber industry will total 14,000 by the end of this month. And pulp workers are being affected, too. Until the recent currency devaluations in Southeast Asia, the B.C. pulp and paper industry had been in the throes of recovery. But banks in such countries as South Korea and Indonesia are making it difficult for local paper companies to obtain lines of credit, so pulp purchases there have been put on hold. B.C. companies such as Fibreco, the pulp and paper arm of Slocan Forest Products Ltd. of Vancouver, have cut back production, and there are worries about the future. “Eighty per cent of our product is sold in Asia,” says Fibreco vice-president Dan Breek. “Nobody knows the long-term impact of the reduction in economic activity in Asia.” The only thing Fibreco can do, says Breek, is to pray that “demand doesn’t dry up” and try to keep prices competitive. Other companies have more serious problems. Doman Forest Products is struggling to pay off a $762-miÛion debt incurred for acquisitions. Fletcher Challenge Canada is coping with a six-month strike at its three pulp and paper mills and refuses to invest more money in the province until costs come down. Analysts suggest that the strike also is holding up the purchase of MacBlo’s paper business. And much to the chagrin of other forest companies, the B.C. government has stepped in to bail out shaky Skeena Cellulose Inc., spending $240 million to buy 52.5 per cent of the Prince Rupert company. “People are incensed because the wood being used by that mill could be used by other mills on the coast,” says Duncanson. Despite the largesse, the question remains whether Skeena will ever be profitable. Pulp and paper operating costs, like sawmill costs, have become uncompetitive—averaging $710 a tonne, compared with $355 in countries such as Indonesia.

Can the B.C. forest industry become healthy and remain competitive? The quotas on Canadian exports to the United States mean that the province cannot lower its stumpage fees significantly—a cut of 50 cents per cubic metre is set to take effect in January—without incurring the wrath of the powerful U.S. lumber lobby. The province boosted those fees in 1994 after U.S. interests alleged that the previous fee structure was an unfair subsidy. In addition, the B.C. government enacted a Forest Practices Code in 1995, which raised costs by imposing regulations on the harvesting and reforestation of the land. And the province’s recent decision to turn large forested areas into parks means there are fewer trees to harvest.

“A lot of people blame the quota agreement with the United States for our problems,” says Doug Smyth, research director with the province’s largest forest union, the Industrial, Wood and Allied Workers Canada. But he believes the soft markets, the shortage of timber, and problems administering the Forest Practices Code are having more of an immediate impact, and that things will begin to turn around next year. “I don’t want to be a Pollyanna—we still have serious problems and high wood costs—but in the market side there is hope.” U.S. lumber normally shipped to Japan was diverted to domestic markets this year, muscling aside Canadian lumber. The hoped-for recovery in the Japanese housing market next year should rectify that, “and there is some hope U.S. consumption will go up too,” says Smyth.

Back at MacMillan Bloedel, everyone is waiting for Tom Stephens’s next move. He already has warned of job losses and company reorganization. “Change is hard for all of us,” Stephens told his employees this month. ‘We will deal with it through faster, more effective communications systems to get rid of the fear. But there will probably still be rumors. In fact, I want you to go back to your divisions and start a few—just please make sure they’re based on what I’ve actually said.” Some words of caution to the wise. □