FOREST PRODUCTS INDUSTRY: TRENDS AND CREATIVE DESTRUCTION
- By Pilot Law LLP
Forestry and the forest products industries have a long history in Canada. Canada has 347 million hectares, or nine percent of the world’s total forested area¹. In 2015, forestry sector exports represented nearly 7% of Canada’s total exports for the year2. Canada is a leading producer of newsprint, northern bleached softwood kraft pulp, and softwood lumber3. Although it contributes less to Canada’s GDP than do the other resource sectors, it creates more jobs than the minerals, metals, and energy sectors4. Its mills and logging operations have, for much of Canada’s history, been backbones of employment in many small towns across Canada. As a result, the significant, almost tectonic shifts in demand for different forest product segments is being felt throughout the country, particularly in smaller towns and rural areas that have long depended primarily on one or a few mills for employment.
The changes the forest products industry has been undergoing, however, are a story of creative destruction, as demand for certain products has fallen dramatically while demand for others has grown. For companies with a significant portion of their historical revenues generated from the production and sale of newsprint or other graphic paper grades, plummeting demand for those products has required the shuttering of many mills and the conversion of others to produce grades or products, such as tissue, for which demand is growing. The changes in demand are driven in significant part by a rapid shift from paper-based information delivery, such as newspapers and magazines, to electronic media. The shift is ongoing, and although there may be some bottom to this decline in demand for graphic paper grades, that bottom may in the end represent nothing more than a small market for niche newspapers, magazines, and journals, as well as paper-based advertising campaigns.
While the graphic paper segments are experiencing ongoing decline, opportunities are being created by increased demand for forest products such as tissue, wood products, pulp, and innovative products resulting from substantial research and development. Wood products remain a staple of the construction industry, and significantly for Canadian producers, the construction material used for most single-family home construction in North America. New product technologies such as cross-laminated timber are also expanding the market for wood as a building material for an increasing number of non-residential buildings as a carbon-efficient alternative to concrete or steel.
While the shift to online media has driven a decline in graphic paper grades, a shift to online shopping has helped drive an increase in demand for packaging materials such as carton-board and container-board. The increase in demand is also driven in part by the expanding population in developing economies that can afford to purchase online or that purchase packaged products at brick-and-mortar shops. This has been particularly the case in China and developing economies across Asia and Latin America, with significant future growth potential in African countries.
Demographics and research and development are also creating expanded markets for pulp and innovative bio-products such as lignin-based carbon fiber. The global growth in the number of people that can afford to purchase hygiene and other products that use pulp as raw material, such as diapers and incontinence products, helps sustain and expand the market for pulp. Pulp is also used to make many of the single use containers such as paper coffee cups and fast-food or quick meal containers, and is added to or used in the production of many food products. The demand for all of these is supported by increasing purchasing power in developing countries. Meanwhile, research and development are helping to create and grow markets for bioproducts produced from wood fibers.
As some markets expand and others are created, companies and communities that have relied on production from declining segments such as newsprint and other graphic papers face a challenge to become part of the forest products industry’s future rather than solely a part of its history. Large forest products companies are working hard to increase efficiencies at the mills that will remain open, shut those that are not and cannot become profitable again, and acquire or build production capacity in profitable and expanding product segments. The communities hosting and depending upon newsprint and graphics grade paper mills for employment are struggling to create incentives to keep mills in their communities, for example, by using tax incentives to make it financially attractive for companies to make the investments required at those mills so that they can produce products from growing segments. In some cases, operations abandoned by large companies may be taken over by small businesses if a local or niche market may support its operations, whether it is a mill or logging operation.
These market developments will continue to challenge the forest products industry into the future. They are complicated by other challenges such as increasing trade disputes involving both imports and exports, resulting in tariffs and quotas of various sorts affecting market access. Consumer demand for forest products certified to various sustainability or other social licence standards also affect cost and profitability. All of the changes together have wrought significant destruction within the industry, but are also creating opportunities.
¹ “Canada’s forestry sector: Rooted in Canada’s economic history”, EDC, available at <https://www.edc.ca/en/article/canadas-forestry-sector.html>, last visited December 10, 2018.