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Canada’s share of global forest product markets has slumped to 10 per cent – less than half of what it was in the mid-1980s.David Ryder/Bloomberg

When Bank of Canada Governor Stephen Poloz talks of a "puzzling" export slump beyond the oil patch, it's because of companies like Fortress Paper Ltd.

The Vancouver-based pulp-and-paper maker should be a beacon for Canada's struggling export sector.

Fortress did all the right things. It reinvested in old paper plants, innovated and aggressively pursued new markets in Asia.

But things haven't worked out according to plan. The company's big bet on transforming pulp into rayon for the global textiles industry has faltered.

Last week, president and chief executive Chad Wasilenkoff, 43, stepped down from day-to-day operations, taking the fall for mounting losses and a languishing share price. He will become chairman.

Forest product companies should be powering Canada's export renaissance. After all, the Canadian dollar is flirting with a 10-year low and the pace of the U.S. recovery is accelerating, along with the housing sector.

And yet exports are flat. Prices and demand for many key products are falling because growth has slowed in much of the rest of the world, including China.

Mr. Poloz has expressed confidence that Canada's export weakness is largely transitory – that things will pick up as the U.S. economy gains strength and the benefits of a weaker Canadian dollar kick in.

But in the forest sector, it's not just a cyclical problem. It's also structural.

The forestry industry, while still Canada's fourth-largest export sector, is a shadow of what it once was.

Exports totalled $31-billion in 2014, compared with $45-billion a decade earlier, a decline of more than 30 per cent. The lost output has triggered waves of plant closures and layoffs over that period – from the dense forests of British Columbia to Atlantic Canada.

Perhaps more troubling, Canada's share of global forest product markets has slumped to 10 per cent – less than half of what it was in the mid-1980s.

Yes, exports are coming back. But much of Canada's production capacity has up and moved elsewhere, in part because the industry didn't do enough to modernize and adapt. And it's unlikely to ever return.

"This inability to regain previous output levels stems from underinvestment in plants and equipment in Canada, often because firms decided to invest in more favourable locations abroad," concluded a report released last week on productivity in Ontario's forest sector by the Ottawa-based Centre for the Study of Living Standards. "This is particularly true in the forest products sector, resulting in a number of operations becoming obsolete due to insufficient investment."

In Ontario, forest product exports have plummeted by nearly two-thirds between 2000 and 2013, according to the report, prepared for the Forest Products Association of Canada. Employment and output are both down roughly 40 per cent over the same period.

There were 50 paper mills in Canada as recently as 2000. There are now roughly 30.

Forest products provided 3 per cent of Canada's gross domestic product two decades ago. By 2013, it had slipped to 1 per cent.

When they do invest, many companies are choosing to put their money in other countries. Three of British Columbia's largest lumber producers – West Fraser Timber, Interfor and Canfor – have snapped up nearly 40 U.S. mills in the past few years, while shuttering mills at home. Roughly 40 per cent of West Fraser's lumber capacity is now in the U.S.

Montreal-based Resolute Forest Products Inc. and other companies threatened this month to pull out of Quebec's vast North Shore region en masse unless the province lowers the cost of standing timber.

In the paper industry, some production has vanished forever as digital information displaces products such as newsprint.

"The sector will likely never return to what it used to be," concluded a companion report on Quebec's forest sector, also produced by the Centre for the Study of Living Standards.

The solution lies in developing new products, investing in state-of-the-art technology and conquering fast-growing emerging markets, such as China and India, according to the report.

As Fortress Paper's experience shows, that alone may not be enough.

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