The 22nd Annual PwC LLP Global Forest and Paper Industry Conference was dominated by the challenging present situation in the industry - mill closures, record losses and an uncertain path to profit. Discussion of the bioenergy industry’s potential was perhaps the one truly bright spot in the day’s conversations, but the enthusiasm was tempered with caution and plenty of questions. Can the power industry and the forest industry find common purpose?

The economics today
Craig Campbell, Leader of the Performance Improvement Practice for PwC’s Global FPP Practice was fairly blunt in his statements about the industry’s present state.

"Why is it so tough to make a buck these days in the industry? Well, the challenge is that the economic influencers of forest and paper operations haven’t changed through the years and the expenditures required to build mills and keep them running are huge. Furthermore, we’ve been dealing with over-supply for many years now, and the current economic conditions aren’t helping. Add in non-differentiated products, and you have the makings for real challenges to make a decent return."   



Furthermore Campbell adds, "Currency deserves specific mention given that it is a major influencer of results, particularly for the Canadian producers. The Canadian dollar hovered near par for the better part of 2008, and then dropped significantly in September and October when the economic tsunami hit. This drop in the value of the Canadian dollar was the one bright light at the end of a tough year for the Canadian forest sector. Considering that the dollar was on average 98 cents for the first nine months, the fourth quarter average of 83 cents was a welcome change. The first quarter of 2009 saw the dollar slip another 2.5% and every cent decline in the Canadian dollar generates CAD$450 million more revenue for the Canadian industry." 



To manage the over-supply of lumber in the market, all producers took downtime in 2008 and continue to do so. Indeed, total Canadian softwood lumber production declined 21% in 2008 from the prior year in reaction to market conditions. Looking at lumber production in the BC interior, where over 45% of Canadian lumber is produced, output decreased 31%. 



"But the reduced production has not kept pace with the decline in housing starts," says Campbell. "Although most economists are saying housing starts are at the bottom, there isn’t an expectation to return to pre-tsunami conditions any time soon. The average of all the analyst predictions for 2010 is about 750,000 housing starts, which is a good jump from the 500,000 that we are at currently, but a big stretch from the two million of a few years ago or even the pre-crisis one and a half million."

In Canada, net losses for the largest public forest, paper and packaging companies in 2008 grew to (US$4) billion in 2008 from (US$900 million) in 2007 due to the collapse of the pulp and paper market which had provided buoyancy throughout 2007. The collapse of newsprint giant, Abitibi Bowater, has brought the challenges of the North American newsprint industry to the forefront. Consumption of newsprint in North America has fallen by 50% in the past ten years, from 16 million tonnes in 1990 to an estimated 9 million tonnes in 2009. 



"We are less diversified, geographically and from a production point-of-view, compared to other regions. This is part of a massive shift in production from the northern hemisphere to emerging market countries, primarily in the southern hemisphere," says Campbell. 



"The economic tsunami that hit last fall washed away hopes of an upswing in the sector," says Campbell.  "We’re working with this new version of normal where low prices, low earnings, and pessimistic forecasts are the way things are. The sector is learning to use all available options to weather this perfect storm and find a way to survive."   
  

"Slow off the mark"
During an opening discussion with John Allan of the B.C. Lumber and Trade Council, and Chair of the newly created B.C. Bioenergy network, it was clear that some believe the development of the emerging bioenergy industry is one way to survive and prosper in this perfect storm.

"In B.C. we have terrific conditions to support the industry," notes Allan. "We’ve got the supplies going for us, and of course not withstanding the recession the demand for green energy is not dissipating. Over the last few decades we’ve seen that when recessionary pressures hit, the environmental agenda goes on the back burner. I think the world has changed dramatically."

Allan feels that B.C. has been "slow off the mark" in developing the bioenergy sector. Although there’s a political will to see the development of renewable energy sources, and the B.C. government has now invested $25 million in developing a bioenergy strategy, Allan believes there’s still something missing.

"Chopping down pine beetle infested trees and converting those trees into energy is awfully expensive, so again, is there something missing in the chain there, is it the proper pricing of carbon, for example? Those are the issues that we really need to tackle."

Allan was quick to stress that he doesn’t see bioenergy as a silver bullet saviour for the forestry industry, but that it’s one area in which the industry is well positioned.

The challenges
Petri Lehtonen, Deputy Managing Director of Indufor Oy in Helsinki, Finland, brought a European’s perspective to the issue. He notes that Europe has become a net importer of pulp and an exporter of paper. But with Asia and Latin America becoming both major consumers and producers of pulp, he doesn’t consider this sustainable.

Lehtonen sees that there will be a growing competition for land and wood. With the drop in paper use and production in Europe and North America, "it means we’ll have an increased supply of small dimension wood," he suggests. At the same time, wood demand for energy use is likely to increase for three reasons - incentive policies in Europe, more efficient use of raw materials, and elevating energy prices.

Europe’s goal to have 20 per cent of its energy supplied by renewables by 2020, according to Lehtonen, is likely to have a major impact on the push for bioenergy production from wood product. In fact, it’s already happening. The imbalance of supply caused by this right now, and likely well into the future, requires the importing of wood pellets from Canada.

The challenge, however - and an issue that several participants raised - is keeping the supply of wood resources balanced. "Access to fibre is an extremely sensitive and difficult issue," notes Harvie Campbell, Executive Vice-President of Pristine Power Inc. "We do believe there is sufficient fibre for everyone but we’ve got to work it out and make sure we aren’t working at cross-purposes."

Campbell discussed some of the most basic challenges that the bioenergy industry must face. One issue is getting the fibre in the first place. There’s fuel supply risk — while power prices are fixed, fibre prices are variable. And as an energy company it’s difficult to bank on getting a long-term supply contract with a mill when mill closures have become all too common.

Roadside debris is a good source, but then transporting the fibre becomes a fuel cost risk as well. Variable stumpage rates complete the complex financial puzzle - "It’s very difficult for me to assess the cost of power if the stumpage today is 25 cents but it could be $10 per cubic metre in 10 years," Campbell points out. "We’ve got to figure that side out. If these risks aren’t managed, the cost of power will be too high."

Petri Lehtonen pointed out also that a reasonable maximum distance to transport waste fibre is between 30-50 miles for it to be profitable.

Catchlight - joint venture promise
Campbell felt that the real secret to the problem is greater dialogue between the forestry and energy industries. Michael Burnside represented an example of what such a dialogue can create. Burnside is President and CEO of Catchlight Energy LLC, a joint venture of Weyerhauser and Chevron dedicated to developing liquid transportation fuel. The aim is to go commercial and large scale relatively quickly.

The interesting aspect of this venture is that it is a "seed-to-sale" company. With their own proprietary conversion technology, they’ve got expertise on the raw materials side and the refining business.

In an attempt to speed their raw material growth, the company is attempting an "intercropping" of energy crops - growing something like switchgrass in the same space in which soft timber is also being grown. "So although the trees are on a 27-28 year cycle, you cold potentially grow an energy crop that would be good for up to nine years before you’d have to replant it," explains Burnside. "The goal would be to get to 5-10 dry tonnes per acre per year, which is a challenge - the current figures for wood production are probably 3-4."

The key for Burnside and Catchlight is that the whole process has to make financial sense, and it has to be managed relatively quickly. There has to be feedstock scalability, a proven economical conversion process, and operating expenses and capital costs have to come down.

Currently, Burnside considers that is oil is US$70 per barrel, that’s a break point for his company’s business model. But as the economies recover, he doesn’t believe this will necessarily remain the same.

"I think the demand for energy will increase so much that the real challenge will be getting all forms of energy delivered," he explains. "It’s not necessarily the case that one is going to displace another."

Communication and common interests
But it’s getting to that bottom line profit sooner that remains a challenge in the bioenergy industry.

To get to that better bottom line is likely going to require more partnerships like that forged by Weyerhauser and Chevron. But to make it happen will require much more communication between interested energy companies and the forestry sector. This was made abundantly clear during the last session of the day, the Executive Perspectives session. The panel included Richard Garneau, President and CEO of Catalyst Paper; Magnus Hall, Chairman of CEPI in Stockholm, Sweden; and James Shepard, CEO of Canfor Corporation.

Garneau was quite blunt in his assessment of biofuel and bioenergy. He said that they are as expensive to build up as a pulp mill, and our raw material costs are too high.

"When you look at bioenergy, it’s really using waste for electricity - you really have to look at the economic model," Garneau notes.

Shepard was just as candid, saying that bioenergy, in his opinion, "is built on creative economics: Frankly, I can’t see the economics of sending a logging truck in to take a log back to be put in a boiler. But the residue, turn that into green power - great.

Shepard, Garneau and Hall all suggested that they have no interest in exploring the bioenergy space right now. All feel that they’re doing what they can to reduce waste, and complicating their business models isn’t in the cards right now.

What appears essential right now for those working to develop the bioenergy sector seems to be better education and fostering relationships with senior executives in the forestry industry.

PwC’s Craig Campbell insists that the only way or the B.C. pulp industry to fix itself is through consolidation and investment in new production and new capacity. "We need to get together and come up with a solution that invigorates and entices investment into new technology," he says.

To Campbell this means, in part, fewer stronger companies — or at least fewer companies in the "big" category that will be stronger and ensure that price volatility will be reduced.

"For the B.C. companies, we need to develop new markets, we need to be more nimble," says Campbell.

Perhaps it will be these larger, consolidated companies that will have the ability to partner with the energy sector to find a way in which to marry their interests together.

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