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Management Side
Changing Times in Canada
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The fortunes of the Canadian pulp and paper industry rose steadily and substantially through most of the 20th century, but have been on a downward trend since shortly before the turn of the 21st.

First the bad news; then we will move on to some more appealing features of the situation in Canada.

Newsprint production is, of course, in free fall, with a number of permanent mill closures, and partial closure of other mills where less efficient paper machines have been retired because of declining demand.

About half the mills in Canada are in towns that depend totally on the mills for local family incomes, and where alternative work for laid-off employees is too far away to avoid moving households. This is, of course, a social and financial disaster for most of the employees, particularly those aged over about 45. Taxpayers are supporting several local populations that are in such trouble. Historically, this has rarely achieved more than temporarily softening the impact, while failing to resurrect mills on a sustainable basis.

However, there is now some good news for the Canadian industry. The two most significant changes in the economic climate for Canadian mills are the demise of the infamous Black Liquor Tax Credit and its various offspring, and the recent drop of the value of the Canadian dollar from around 95 US cents to around 80 US cents.

The Black Liquor Tax Credits consisted of a range of tax refunds, tax exemptions and outright grants to kraft mills for burning black liquor, as they had done for over 60 years and as all other kraft mils in the world do. Correct names for the basic schemes are "Alternative Fuel Mixture Credit" and "Cellulosic Biofuel Producer Credits".

Mills had to add a trickle of diesel or other oil to the black liquor to obtain some of the credits, but the cost of doing so was trivial.

There are various estimates of the financial benefit to US kraft mills. About $25 Billion over the 2005-2014 period seems to be fairly well accepted by those with no stakes in the issue. Depending on which data is considered reliable, and on how the taxation benefits are evaluated, this subsidy has been equivalent to US $100 to $150 per ton of pulp, which is a rather large fraction of the typical production costs, which are on the order of $600/ton. Canadian mills received a token subsidy of about a billion dollars Canadian that was supposed to compensate them, but the amount each received was far too small to make a real difference.

The whole issue of which pulp and paper producing country benefits most from taxpayer subsidies is complex and the numbers are widely disputed. But for the pulp industry, the Black Liquor Tax Credit and its offspring are the 800 pound gorillas in the closet. Presuming they are not resurrected yet again, Canadian mills and other pulp exporters will get a boost at the expense of American mills. These impacts should become visible during this year.

The drop in the value of the Canadian dollar relative to the US dollar will have an immediate impact on profit margins, and will help Canadians compete with US mills.

The dive in oil prices will be of some help to all mills by reducing transportation fuel costs. Very few mills burn oil as a prime fuel for steam generation, but lower oil prices may help reduce natural gas prices. The greatest benefit the low oil prices will bring to Canadian mills is that construction labor costs will probably drop due to the dramatic decline in investments in the Alberta oil sands. Mills in Western Canada have had considerable difficulty attracting skilled maintenance staffs in recent years, due to the high demand and high salaries in the expanding oil and gas industry.

However, this will take some time to have any practical impact. If oil prices rise again to the $100/bbl level, then the benefit will evaporate.

Even more good news is that the aggressive research and development in new products made from wood and wood waste, on old mill sites, seems to be moving forward, with pilot plants coming along in Canada as well as overseas. I wonder whether they will become economically effective, particularly those making fuel from wood waste. However, a lot of researchers and businessmen who are much more knowledgeable that I am, are working hard on these issues, as evidenced by the extensive presentations at PAPTAC's conference in Montreal last week. While many presentations were on subjects that have been discussed for years, about a third of the presentations were on subjects that would have been unheard of at same conference ten years ago.

I do not have a crystal ball, but by rubbing my glass paperweight and considering the foregoing, I think that the next couple of years will see a considerable improvement in the fortunes of the Canadian pulp and paper industry.
 

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