Business in Vancouver January 15-21, 2008; issue 951

Ailing $4 billion industry hoping to attract needed investment from bio-energy power generation to survive market downturn

Krisendra Bisetty

Bio-energy could help rescue B.C.’s ailing pulp and paper industry.

The $4 billion economic engine for communities across the province is in a fierce battle for survival. It’s up against global competition and poor market conditions that have dropped its return on capital to a paltry 4% over the past 15 years. That’s far below the 12% minimum required for a healthy industry. It has also sounded a clarion call for renewal.

But a new report by the B.C. Pulp and Paper Task Force, a co-operative made up of representatives of industry, including all 20 pulp and paper mills across B.C., labour and government, warns that while the industry is falling behind its competitors in other regions, it requires strategic reinvestments and sound public policy if it’s to be renewed.

And those investments would likely only be made if the industry were given incentives to tap new revenue streams that would make the business viable long enough so that it can take advantage of an anticipated future turnaround.

“If we don’t get any help through policy changes and we just keep going down the path we’re going, it’s tough to see a bright future,” task force chairman David Gandossi told BIV. “So it’s tough to reinvest, and the mills are just slowly depreciating over time until we’ll see more of what we’ve been seeing happen, happen through lack of investment. The mills that go away, go away because they haven’t been re-invested in, and they get to a point where it’s just too much money for not enough return.”

Industry players, however, are bullish on northern bleached softwood kraft (NBSK) pulp production as consensus grows that global scarcity of the commodity will increase as demand for tissue and specialty papers grows in places like India and China.

Canada produces about 40% of the world’s pulp and all of its input costs are in Canadian dollars. So although the NBSK pulp grade currently sells at US$870 a tonne, a high price in U.S. dollar terms relative to where it’s been for the last five years, once revenue is converted to Canadian currency, it’s a third less now at parity than when it cost Cnd$1.50 for a greenback.

Industry insiders say there’s still room for pulp prices to improve, and are looking forward to a time of increased demand.

The question, however, is can they weather the converging forces of global competition, growing concerns about fibre availability and affordability and pressures from the rising Canadian dollar?

“We just got to make sure that we hang in there long enough so we can take advantage of that,” said Gandossi. “Every time a mill fails is a lost opportunity for B.C.”

The industry is pinning much of its future hopes on a new revenue stream: bio-energy – turning wood chips into electricity to be sold into the grid. All the task force member companies want to be involved in bio-energy, said Gandossi, a Vancouver-based executive vice-president and chief financial officer at Mercer.

The task force includes Canfor Corp., Canfor Pulp LP, Catalyst Paper Corp., Cariboo Pulp, Howe Sound Pulp and Paper, Mercer International, Neucel Specialty Cellulose, Tembec Inc. and West Fraser Timber Co. Ltd.

Half the wood chips consumed by kraft mills go into pulp for paper or tissue products. The rest is broken down to “black liquor,” a biofuel that’s burned in recovery boilers to extract chemicals and produce steam that generates electricity.

Several B.C. mills are energy self-sufficient, but all they’re doing is displacing the cheap industrial power they would otherwise have had to buy.

Now they’re asking government to recognize the power they produce as green energy, thereby enabling them to sell the electricity into the grid at much more attractive rates.

“Thirty-five megawatts of power at green rates would be worth about $15 million a year to the producer,” Gandossi said. “So all of a sudden you’ve got a whole new line of business that gives you reason to be optimistic for the future.”

That provides a reason, as well, to reinvest in other aspects of the mill.

Some northern B.C. mills have generators that are 30 years old, and operators are looking for incentives to replace them. If none are forthcoming, they’d simply vent the steam they produce and buy cheap power.

However, government policy changes could stimulate investment in the pulp side because it makes the business viable, said Gandossi.

“If you produce more pulp, you produce more biofuels, so you’re going to be even more motivated to make more production and to prolong the life of your mill and to maintain it because it’s viable.”

kbisetty@telus.net