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Canada has a strong competitive advantage in forestry due to our natural endowments, but that is not enough for continued success. Many of Canada's current forestry products and services are generic and can be easily matched or replicated by other firms in other nations, often with the advantage of lower labour and growing costs.

The best way to keep building on our natural advantage is to find ways to raise the IQ of our forests – in essence to create value from the forests by using more brain, and less brawn.

The Canadian forestry sector is in the midst of a robust short-term recovery. The Conference Board of Canada produces a detailed forecast of industry activity for wood products and for pulp and paper. Both segments are expected to have fairly robust revenue growth in 2014 and into 2015, although they are on diverging longer-term growth paths.

Let's consider wood products first. Traditionally, this sector has relied heavily on sales into the American market, and specifically the U.S. housing sector. The collapse of the U.S. housing market in 2008 hit Canadian wood producers hard, forcing both a resizing and restructuring of the industry, and a rapid search for new export markets. Many sawmills and forestry businesses across the country were forced to close or to contract sharply.

In response, companies quickly searched for new market opportunities in Asia and other high-growth markets. B.C.-based firms were particularly successful in diversifying by finding new sales opportunities in China, relieving some of the pressure on the industry due to the U.S. housing collapse.

After four years in the doldrums, the U.S. housing sector is finally on the mend. Housing starts are slowly recovering, and are projected to reach 1.1 million in 2014 and to climb to 1.4 million in 2015. This is good news for Canadian wood products suppliers, and the sector is projected to grow by around 5 per cent this year and next.

The story in pulp and paper is quite different – and more difficult. With digital media replacing paper media, demand for paper in developed economies is in the midst of a long-term decline. Newspapers have been particularly hard hit, but all forms of paper media have been affected.

One of the better-performing segments in the industry is pulp. Demand for paper products in emerging markets is still rising and many of them are fibre poor. China in particular has become an important export market for Canadian pulp, supplanting the U.S. as our largest export market. As a result, after more than a decade of weak growth or outright contraction, the pulp and paper sector is also expected to perform better in 2014.

However, the demand recovery for both wood products and for pulp and paper in 2014-15 is unlikely to be sustained without fundamental changing how we extract value from our forests. Growth in both segments is expected to tail off after 2015 due to flattening demand in the U.S. and Asia, unless something is done to change the product mix.

In some respects, innovation in the sector has already begun. Investment in intellectual property (IP) in the wood products industry in particular has steadily risen over the past decade, which holds out promise that the forestry sector can become less generic and more specialized with higher value added. In specific terms, this means the production of specialized forest-based inputs that could be used in emerging sectors, such as bio-fuels, life sciences, or industrial inputs that are produced via 3-D digital printing.

With their traditional markets shrinking or stagnant, necessity has driven Canadian forestry companies to experiment with new product development. But to create enduring value, IP-based forestry needs to move from the fringes to the core of the industry. Now is the time to accelerate that transition, while demand growth is strong and cash flow is available. The wood-framed window of opportunity won't be open indefinitely.

Glen Hodgson is senior vice-president and chief economist at the Conference Board of Canada. Michael Burt is director, industrial economic trends, for the Conference Board of Canada.

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