Canada: Forestry industry must diversify, capitalize on demand for green energy

MONTREAL - The federal government can help rescue Canada's battered forestry industry and thousands of jobs by providing $1.5 billion in funds to encourage diversification to new eco-friendly uses such as biochemicals and bio energy, says a new study released Monday.

The forest industry needs to extract the maximum value "from every tree harvested," said Avrim Lazar, president of the Forest Products Association of Canada.

New technologies will allow wood fibre to be converted into bio-fuels to heat homes or power vehicles as well as bio-chemicals to make cosmetics, solvents, food additives and renewable plastics.

The new green model would help Canada become a clean energy superpower by producing enough bioenergy to heat one out of every five homes, or the equivalent output of nine nuclear reactors.

The industry must harness this potential while taking advantage of an eventual recovery of demand, he said.

Simply responding to increased demand is not economically stable. And switching to bioenergy or biochemicals provides only 20 per cent of the job potential.

"It turns out when you look at it in detail, both those theories are half truths," he said in an interview from Ottawa.

"Actually, it is more surprising than not that the best possible future is integrating those new things into the existing system."

The association is calling on Ottawa to offer economic stimulus to facilitate the change through research, tax breaks and other funding. The price tag is $300 million annually for five years, half of which can come from spending reallocation.

Developing non-traditional uses of Canada's forests would spur investors to take another look at the industry, Lazar said.

"With this new attitude of value extraction, the economics become a great deal more robust."

The study was headed by Don Roberts, managing director of CIBC World Markets. Based on interviews with 65 experts as well as industry leaders and government, it predicts a bright future for the forest industry despite the economic downturn and collapses in the demand for lumber and paper.

The forestry sector, which includes the pulp and paper and lumber industries, was hit hard by the slump in the U.S. housing market and changes in newspapers and magazines, caused by the recession and the migration of ad revenues to the Internet.

Nearly 94,000 Canadian forest jobs have been lost during the first nine years of the century in most provinces, but primarily in B.C., Ontario and Quebec. The association says there needs to be changes to sustain the industry's remaining 270,000 jobs.

"This is the very best bet for protecting those jobs," Lazar said.

The head of Canada's largest forestry union said the industry association has developed the right formula to create lots of jobs in the ailing industry.

But Dave Coles of the Communications, Energy and Paperworkers Union is concerned the Harper government won't deliver necessary funding.

"I am afraid that it will fall on deaf ears. We are still getting no indication from the federal government that they view the forest industry except as a sunset (sector)," he said in an interview.

Coles said developing an integrated forest industry would be good for the economy, environment and rural communities.

"If properly executed, this is a foundation to revitalize the forest industry," he said, adding that the paper industry must also convert away from newsprint to specialty grades.

Natural Resources Minister Christian Paradis agreed that diversification is key to the forest sector's future prosperity.

Without commenting directly to the request for additional funding, he said the government has made "significant investments" since 2006.

Its $1-billion green transformation program is helping companies to fund capital renewable energy programs. The stimulus plan also provided $170 million or $292.5 million investment to expand new domestic and international markets and advance innovation.

"Our government is working with partners such as the Forest Products Association of Canada and FPInnovations to build a world-class industry that is a driver of growth and a leader in the clean energy economy of tomorrow," he said.

Paul Quinn of RBC Capital Markets said the association's proposal seems like a reasonable tool to refocus the industry.

"The difficulty is going to be trying to get the money from a federal government that is looking at big budget deficits and would like to get back on track.".

Stephen Atkinson of BMO Capital Markets said any plan must start off by reducing wood costs, which have been inflated because of provincial policy and the softwood lumber agreement with the United States.

"If your wood cost is high, which it is, then it doesn't matter what you do, you won't be viable," he said.