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Sept 2003 - Guest Column

The BC coastal forest industry is in the critical care ward.

By Paul McElligott

The BC coastal forest industry finds itself in a tough situation today and, appropriately, the solutions are also going to be tough. I am going to be fairly candid with my remarks because, given the state of things, this is not the time for sugarcoating the situation and pretending the industry is not in serious trouble. The fact is the logging and sawmilling industry on public lands on the BC coast has been spiralling downwards for many, many years. No matter which economic trend or indicator you wish to look at—be it lumber production, harvest levels, employment, investment, market share, capital utilization, earnings or return on capital employed—that is the case.

You cannot help but conclude that the public lands business on the coast is on its back, it is badly broken, and the status quo is no longer an option. A more accurate analogy is that the industry is in the critical care ward, requiring major surgery to survive. And were it not for a favourable exchange rate—which in itself has become questionable in recent months—and the presence of high-value cedar on the coast, we would have gone directly to the morgue some time ago. While TimberWest’s Crown harvest is indeed only one-third of our annual cut—at 1.2 million cubic metres per year—it is still significant, making us one of the four largest tenure holders on the coast.

Our public lands are underperforming and it has my attention because our investors are looking for a commercial return on the funds they’ve entrusted to management. My analysis of the situation suggests that the coastal industry has failed for two sets of reasons. The first relates to external factors and these include the fact that principal end-markets like Japan softened considerably with the Asian economic crisis in 1997, and have yet to recover. At the same time, Japanese customers are changing their preferences and moving away from green products, which the coast produces more of than anything else, to dry products.

So there have been external issues related to the decline in the coastal industry. I cannot help but think, however, that any business is up against a constantly changing external environment. Who can say that his/her industry is insulated from these types of external changes? It seems to me that one of the elements that separates the winners from the losers is how well they anticipate and adapt to such changing business conditions. Which brings me to the second set of factors why our coastal industry has failed. These are internal in nature, and of our own making, and I believe they played a more profound role in the coast’s demise.

In a nutshell, the problem underlying most of our ills is that government was and is too involved with our industry, both from an ownership point of view and as its regulator. As we know from baseball, you can’t be both a pitcher and an umpire. No doubt well-intended, and perhaps even appropriate long ago, BC government policies like appurtenancy, cut control, minimum processing requirements and others, led to a set of entitlements over time for licensees, labour and contractors.

The unfortunate outcome was that costs increased while industry competitiveness and flexibility decreased. We had, and continue to have, a centrally planned and controlled forest industry where government stipulated harvest levels, irrespective of market conditions, and prescribed in great detail how to harvest the resource. It was social engineering in its purest form and, like most attempts at social engineering world-wide, it has failed. What was thought to be good public policy for workers and communities turned out to be their death knell because the coastal industry has become the highest cost jurisdiction in the world. It continues to lose market share and, as a result of its deteriorating financial condition and profitability, it has been starved of both sustaining and growth capital.

Logs are getting smaller and more second growth harvest is coming on stream. The reality is that we do not have the machinery and equipment in place today to process these logs efficiently. So how do we get out of the critical care ward and into a healthier space? I believe the industry needs to do three things: it must rationalize and get smaller, it must get costs down and it must improve the utilization of both human and capital resources.

The IWA, Bill 13 contractors (who have guaranteed harvesting rights for half of the Crown harvest) and licensees each have a role to play in making this happen. If they rise to the challenge, the resulting positive impact will register on financial statements and the industry will attract the new capital so badly required to modernize existing facilities and construct new ones. This will create new jobs and economic prosperity. If they don’t rise to the challenge, new entrants will replace them. While private sector industry participants must change, governments at both provincial and federal levels must also change by removing barriers and creating the policy environment that enables the required restructuring. They have to abandon the social engineering of the past and embrace a set of reforms where market forces drive timber prices, market forces drive government stumpage revenues and market forces drive timber-harvesting fees.

I’ve covered some emotional topics but I hope that someday soon people will be able to set emotion aside and logically look at how we can get the best and most sustainable value from our forest resource.

Paul McElligott is President and CEO of TimberWest Forest Corp, the largest private forest landowner in Western Canada.

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