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In a pulp-and-paper industry that is struggling to reinvent itself, Lebel-sur-Quévillon was a symbol of renewed hope. But in an unexpected twist of Chinese misfortune, prospects for the small northern Quebec town now look as dark as an ink blot.

Fortress Paper Ltd. was about to relaunch the kraft pulp plant formerly owned by Domtar Corp., the company that gave birth to Lebel in a black spruce forest in the mid-1960s. Expecting to hire 300 employees, the plant was to produce viscose rayon staple fibre, a textile fibre used to make clothing, tissue-like tablecloth or diapers. The province's investment arm has lent $132-million to the project, which was unveiled with great fanfare by then-Quebec premier Jean Charest in early 2012.

But negotiations with financial partners for the $300-million project have broken down over the uncertainty raised by China's newly proposed 49-per-cent duty on production coming from new Canadian plants, which is markedly higher than the 13-per-cent duty on existing plants. China accounts for about 40 per cent of a rapidly growing world market. "It's obvious that if we can't convince them to scrap that duty, this project is over," said Yvon Pelletier, president of Fortress's dissolving pulp division.

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The situation shows how difficult it is for the forest-products industry to transition toward innovative and value-added products just as falling demand and rising production costs are wreaking havoc in its traditional markets. There's a downward spiral of layoffs in Quebec, long a stronghold of newspaper pulp, where the province's biggest newspaper chain is almost begging readers to trash their print subscriptions and switch to its free iPad edition to shed printing and distribution costs. The industry once employed more than 100,000 Quebeckers, but that's dropped to 65,000, according to the Quebec Forest Industry Council (QFIC). Lumber sawmills are one of the few bright spots in the sector as hammers resonate once more on American construction sites.

Fortress is not alone in exploring new avenues. Domtar and FPInnovations launched in 2012 an experimental plant in Windsor, Que., to produce nanocrystalline cellulose, or NCC, a promising bio-material that could have wide applications in the chemical, food and pharmaceutical industries. And yet their NCC has yet to find commercial takers.

Those setbacks haven't discouraged the forestry giants. They are asking the Quebec government for more subsidies for plant conversions – all the while blasting the province's environmental and sustainable development policies. The wood-allocation reforms spearheaded by the previous Liberal government have led to a 25-per-cent increase in the price of fibre since 2011, forestry executives contend, and fibre accounts for roughly half of the industry's production costs.

"How can an industry survive and thrive in this environment?" asks a simmering James (Jim) Lopez, president and CEO of Tembec Inc.

The complaint has been heard so often it sounds like a broken record. And yet the industry has found a new way to approach the government for aid, eyeing reduced electricity rates. Ever since Finance Minister Nicolas Marceau said he would use Quebec's electricity surpluses to attract new investors, companies have been lining up to demand lower rates to stay in the province. Talk about backfire. First came Alcoa, which is threatening to close its three aluminum smelters come 2015. Now it's the forest industry's turn.

"Before attracting new companies, why can't we use those surpluses to support the companies that are already here so that they can transform themselves?" suggests QFIC president André Tremblay. But while the industry is courting the government once more, it is also threatening to invest elsewhere. Case in point: Tembec, which has to decide how it it going to allocate $80-million in investments between its Ontario and Quebec sawmills.

"It is an unfortunate truth that if you are faced as an investor with the decision on where to put your money first, it will not be in Quebec – not with this business environment, not with this fibre supply, not with the rapid rise in the cost of wood," says Mr. Lopez.

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This will make for an interesting conversation on Thursday, when the industry's top executives meet with Quebec Premier Pauline Marois and Natural Resources Minister Martine Ouellet at a forest sector summit in St-Félicien. As Richard Garneau, president and CEO of Resolute Forest Products, puts it, the industry wants to work with government to find solutions. But scratch the veneer of politeness just a little, and it sounds more like a financially struggling couple on the verge of divorce.

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