World Report

Sound fundamentals and new investment underlie optimism about the future for one of the country’s most vital industries

Branching out: companies are expanding, modernising and upgrading facilities to broaden their customer base anada’s forest products industry has braced itself for a tough year. Newsprint output fell by nearly a quarter last December to 592,000 tonnes, from 776,000 the previous year. Exports to the US were down 13 per cent and shipments elsewhere fell 30 per cent.
This should be seen in context, however. Exports of Canadian wood products were worth a record US$47.4 billion in 2000 and employment in the sector grew by more than 20,000 in 1999-2000.
Both the federal government and provincial administrations are investing in the industry – a prime objective being to create jobs. The Quebec government, for example, is lending US$92.6 million as part of a US$250 million plan to install modern high-capacity paper-making machinery at Kruger Wayagamack mill in the province. This will create 110 jobs.

Weaver
‘Europe is still a relatively good market for growth’

Montreal-based Abitibi-Consolidated, the world’s largest newsprint producer, has been weathering the downturn through rigorous cost controls. Although the price of newsprint softened in the first quarter, the company’s president John Weaver says it should pick up in the second half of this year.
Abitibi has mills in Canada, the US, UK and Asia. The company’s profits slumped to US$2.5 million in the fourth quarter of 2001, compared with US$92 million in the same period of 2000, but its performance still beat market forecasts. Analysts say that, considering the 20 per cent drop in newsprint prices, firms came out better than predicted.
Mr Weaver says Abitibi has “some very fundamental strengths” that have enabled it to make a return for shareholders, albeit somewhat diluted. For example, the firm generates a quarter of its own electricity. “Our low-cost portfolio and long-term initiatives have enabled us to improve our cost position, despite significant downtime,” he says. “Over the next five years we are focusing on reducing our energy use by one per cent a year, to help improve our self-sufficiency.”

Mr Weaver draws an interesting parallel between North American and European newsprint manufacturing. “Europe is still a relatively good growth market. It’s no Asia, but it is growing by two-to-four per cent a year. Historically, it has done better than the US. Certainly, some markets, like the UK, have a very high newspaper readership and competitive market, whereas in the big US cities you tend to find only one or two newspapers.”
In North America, demand varies from region to region, whereas in Europe demand for better paper tends to be higher, Mr Weaver adds.

When pundits were predicting a decline in reading due to internet and digital technology, they overlooked the demand for high-quality print images which, of course, require high-quality paper. To an extent, improvements in IT and graphic reproduction have fuelled demand for higher paper grades.
Quebec-based Tembec is part of a consortium planning a US$298 million reconstruction of Chandler mill in the Gaspe region of Quebec. The former Abitibi-Consolidated newsprint mill, which closed in 1999, will be refurbished to produce high-gloss coated paper, creating 260 jobs.

Dottori
‘We can expect more rationalisation in forest products’

Tembec has mills across Canada, the US and Europe. Most of its business is lumber, specialty pulp, newsprint, and magazine paper and carton board. Its chief executive, Frank Dottori, says: “Expect more rationalisation in forest products and it could take two or even three years for prices to return to the long-term line trend.”
With the addition of the Chandler mill’s estimated 200,000 tonnes-a-year capacity, Tembec will be the sixth-largest paper producer in North America. Mr Dottori says: “With this hi-tech state-of-the-art project, our participation in the reopening of Chandler mill will not only enable us to pursue our growth strategy but also give us an edge in a highly-competitive market.”
Last year, Tembec became Canada’s leading producer of specialty wooden flooring, windows and furniture when it bought Davidson Industries’ mills near Ottawa and in New Hampshire (US), as well as a distribution centre in Ireland.
Dominic Gammiero, chief executive of Nexfor, another leading player, says sound fundamentals have helped his company through the slowdown. “Our strong financial position, business mix and cost-effective operations position us well for strong earnings growth as conditions recover. This will continue to be a tough year, but we expect some improvement.”

Quebec-based forestry-products giant Cascades, recorded a profit last year of US$120 million. The company, which makes box and container-board, tissue and fine paper, saw sales hit a record US$3 billion, up 5.5 per cent on 2000. Its president, Laurent Lemaire, says the improved performance was a result of major restructuring last year.
Vancouver-based Norske Skog Canada suffered a fall in fourth-quarter earnings, but its president, Russell Horner, believes the cyclical nature of the sector will see a return to more favourable conditions as the US economy recovers.