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Corporate Takeover Trend in BC is Not Finished


By Jim Stirling

Tembec and Crestbrook; Donohue and Finlay Forest; Louisiana Pacific and Evans Forest; West Fraser and Zeidler; Weyerhaeuser and MacMillan Bloedel; Canfor and Northwood. The corporate structure of British Columbia’s forest industry is changing rapidly and dramatically. Consolidation is seen as the vehicle to cut costs, improve efficiency and allow fewer, larger players to be profitable and globally competitive. This latest takeover trend is unfinished. No particular sized operation appears immune. Several forest company executives in BC wonder if the next strategic move will have their operation emerge the buyer or the buyee. The trickle-down effects of these head office manoeuvres permeate all lev-els of the forest industry and the commu-nities it sustains. Consequently, there are a lot of nervous people out there. Canfor’s proposed acquisition of Northwood was no great surprise; the two parties had been talking seriously for months and something was going to happen. When the provincial government approves the deal—which it will—Canfor will buy Northwood for $635 million from its Canadian and US owners and assume the company’s $170-million debt. Northwood’s assets include a pulp mill, three sawmills and a plywood plant in the Prince George area, one of the world’s largest sawmills in Houston, BC and a joint venture value-added plant in Moricetown, near Smithers. Northwood has 2,200 employees in its Prince George and Houston operations. Canfor operates two pulp mills in Prince George and nine sawmills in BC and Alberta and employs directly and through affiliated companies about 5,000 employees.

 

Between them, the companies have annual sales of more than $2 billion. Canfor will be Canada’s largest lumber and kraft market pulp producer. The new Canfor will have 11 per cent of the provincial Annual Allowable Cut and 30 per cent of the AAC in the central and northern interiors. “This will put Prince George right at the top of the heap as a forest producing centre in the world,” said David Emerson, Canfor’s CEO, when the buyout was announced officially in August. He conceded an undisclosed number of head office jobs will be lost, but said production jobs in the plants are secure. But while the dust settles, the longer term implications of the buyout on jobs and mill closures is less focused. A Canfor goal is reducing costs and it figures buying Northwood will slash them by $100 million. Cutting jobs is a much-practiced method of cost reduction. The potential is accentuated by the companies’ overlapping operating areas. Canfor says to grow it needs more production capacity. But Canfor and Northwood have found it necessary recently to close money-losing plants.

Canfor permanently closed its Prince George sawmill in March. Some industry observers question the fibre availability to sustain the province’s sawmills and pulp mills. Northwood’s independent timber harvesting and log hauling contractors are feeling vulnerable. Northwood has explored the efficiencies of having fewer, but larger, contractors. The province is also entitled to withhold five per cent of Northwood’s AAC when the forest licences change hands. The loss of 170,000 cubic metres of annual cut could mean fewer contractors. Canfor can propose uses for this wood vol-ume, the government can direct it to the small business forest enterprise program or alternatively allocate it to community forest use. Other factors will cloud Canfor’s future options.

BC’s lumber industry has been making money in 1999, despite losing $1.1 billion in 1998. But, unfortunately, the robust lumber market in the US will not sustain its current levels. Margins will likely tighten again this fall and winter. The province’s high operating costs that have shackled the industry’s competitive edge during the last few years haven’t gone away. The government has trimmed operating costs but BC regulations still make the province by far the highest cost producer in Canada. The strong lumber demand has coincided with companies beginning a new quota year for softwood lumber shipments to the US. Understandably, the industry has been making hay while the sun shines. But the quota deal will expire in 17 months. The status quo, a different deal or no deal will be under hot and heavy discussion next year with significant ramifications for Canfor’s lumber production and marketing strategy.

The new Canfor’s near-term forest management and planning procedures will most likely be disrupted, along with those of other companies operating in BC’s Central Interior. The mountain pine beetle epidemic that began in Tweedsmuir Provincial Park is now estimated to cover more than 300,000 hectares and growing fast. Forest companies have formed an emergency task force to work with government agencies and others to stop the destruction. That probably means widespread clearcutting, if control is to be effective. Clearcutting raises the immediate ire of vocal lobby groups. It all spells trouble: fibre volumes with lesser value and added costs.

Battling the beetle and clearcutting are excellent fodder for First Nations bands to pursue with the provincial and federal governments their goals for settling land claims and aboriginal rights to natural resources. Dissatisfaction with the pace of negotiations of those issues has led to the Indian blockade of one regional forest road this summer curtailing log harvesting. Much can be said for having one strong, healthy company compared with two marginal ones. But it will be instructive to see in the coming months how the “mega-Canfor” will juggle the evolving external factors with its anticipated economies of scale.



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