Comment Column

Canadian market pulp: Limited supply?

In 1981, Canada had 28% of the world's capacity to make chemical paper grade market pulp. In 1997, 16 years later-despite the encroachment of southern pine, radiata pine, eucalyptus, and now mixed tropical hardwoods-Canada still has 25% of world capacity, and 39% of world softwood, 12% of hardwood, and 64% of northern softwood. Actually, once we flush out the Nordic capacity transferred to European subsidiaries, Canada's share of northern softwood is closer to 72%-almost a 3:1 ratio over Nordic competitors.

We already know that when the world's pulp and paper industry operates at 95% of capacity, competition for wood is intense. This is not going to change as we move forward. Demand for good-quality softwood will only intensify, driven by economic growth, increasing living standards, and a rise in the middle class in newly industrialized nations. Furthermore, it has been forecasted by wood experts that plantations will meet only 15% of the demand growth for softwood fibers vs 45% for hardwood. At the same time, environmental pressures are likely to continue to limit growth of supply, as we have seen in the western U.S. and British Columbia. Siberian forest resources are not likely to be a factor any time soon. So northern softwood is a strategic resource.

In addition, improved papermaking technology will place an increased value on high-quality softwood kraft pulp in certain grades. Here are just a few examples:

• As paper and printing machine speeds increase, runnability and strength will be critical in coated base papers, driving demand for high-strength, longer fiber pulp.

• In the bid to decrease paper costs, basis weights will trend downward; lower basis weight papers require a higher content percentage of softwood pulp than heavier ones.

• Canada's hardwood position, although smaller in the international context, will continue to enjoy a niche market in photographic, laminating, and other specialty applications. Yet, despite my view that Canada will continue to be force in market pulp supply, it is also absolutely clear that to keep up this pace, we require massive financial engineering. But this is easier said than done because there are some well-fortified obstacles:

• In Canada, 35 mills produce chemical market pulp that is sold through 23 market pulp organizations.

• The Canadian industry has diverse ownership-50% Canadian, 29% U.S., 13% Japanese, and 8% other.

• Canada's provincial governments own 90% of our fiber resource, and fiber makes up 50% of our cost of production. The different provincial jurisdictions can have a tremendous influence over fiber supply, stumpage, cost of harvesting, and indeed, veto rights over mergers.

• Politics make it extremely difficult to close pulp mills permanently, particularly in remote communities. This all adds up to a splintered, unfocused marketplace. I believe that change in the Canadian pulp industry will take many forms:

• There will be mergers.

• Some integrated pulp mills could effectively become market pulp mills by an ownership change.

• There will be certain integration of the Canadian market pulp industry through acquisitions, consolidations, or onsite integrations.

• There will be a renewal of the Canadian pulp mill asset base that, to a large extent, will be achieved by outsourcing capital projects to third parties, such as recovery boilers operated by energy companies. Our capital will be focused on our end product-pulp.

• Governments that control the resource will come to realize-some quicker than others-that for Canadian industry to survive competitively, sustain employment, and renew our asset base they will have to change their policies. Canada's pulp and paper industry must-and will-change as global markets emerge. We will rationalize current and future projects to prevent overbuilding capacity. Doing so will guarantee Canada's future role as the main source of market pulp supply to the world.