With the forestry industry reeling from the high cost of energy, fibre and a strong dollar, a hidden cost of remaining competitive is the need to upgrade operational infrastructure.
“If you don’t make these kinds of investments, you’re not in business,” says Russ York, CFO, Buchanan Forest Products Ltd.
While acknowledging that investment in infrastructure upgrades is very risky in an unstable market, York says companies ultimately stand to lose money if they’re not willing to spend it.
Buchanan has recently spent nearly $6 million on building slasher complexes at their Nakina and Longlac plants, and details are being developed for a $45 million project to establish a steam boiler at the Terrace Bay facility.
“The industry hasn’t been very profitable over the last 10 years, and people are reluctant to re-invest, but that’s why we have a few less pulp mills in Northern Ontario,” York says. “People didn’t invest and now they gotta pay the price, but there’s not that many left. So either you try to change and solve the problem, or you will be the next one that’s part of the problem.”
The Terrace Bay project will help to reduce the company’s reliance on the electrical grid, eventually making the company energy self-sufficient. This will serve to bypass the fluctuations in energy prices that often threaten forestry companies.
Jim Lopez, president and CEO of Tembec Inc., agrees that this course of action is generally preferable to increasing production capacity, which many of the aging mills across the province cannot handle.
“What I like to tell our people is that if you have a project to spend a dollar in a mill, and one option is to increase production, and the other option is to produce energy, all things being equal, I’ll put it into energy,” Lopez says. “It’s almost a guaranteed return, and if there’s one single issue, I would say that the mills that are going to be around in the next five to 20 years are going to have put money into reducing their energy costs or increasing their energy production.”
Lopez says although some progress remains with regards to red tape as well as energy and fibre costs, the Ontario government has done considerably more than competing provinces to assist businesses with the viability of upgrading.
He identifies Ontario’s Demand Response program as a key example of what needs to be done to help forestry companies survive in the long term by keeping costs low, thereby freeing up investment capital.
“To be fair, the province of Ontario has done more than just about any other province in Canada in the last three or four years, so I’m always careful about criticizing [Ontario Natural Resources Minister] David Ramsay and [Ontario premier] Dalton McGuinty, because they’ve taken some pretty bold steps. Frankly, I wish the province of Quebec, which is another big province for us, would have taken the same bold steps a couple of years ago.”
Buchanan's York also hails the provincial government for its contributions of various grants and loans to forest industry firms for upgrades. The province’s Forest Sector Prosperity Fund provided Buchanan with a $600,000 grant for the Nakina project, and has also assured the company of a $11 million grant and a $11.5 million loan guarantee for the Terrace Bay project.
“The lenders are becoming much tighter on their requirements, so it’s difficult to get the necessary capital to do upgrade projects without this kind of assistance,” York says.
Jamie Lim, president of the Ontario Forest Industries Association (OFIA), suggests the problem regarding infrastructure investments initially took root in the past decade marked by a weak Canadian dollar. This created a situation where the forest sector’s costs were inadvertently permitted to run rampant by the province, industry and labour alike, she says. As a result, the industry has been left facing an uncertain future and an unfriendly climate for infrastructure investments.
“We know that investors look for the right business conditions to invest in,” Lim says. “No board is going to make a business investment because they like somewhere. I don’t know a board that would make that kind of business decision, and if you put yourself around that table to make that choice, you have to look at cost.”
