A resurgence in the U.S. housing industry bodes well for Canada’s forestry industry, which suffered mightily when America’s real estate bubble burst a decade ago.
According to the Conference Board of Canada, U.S. housing starts are growing by double-digit rates and are forecast to reach 1.9 million by 2020, as reported by The Conference Board of Canada. This is welcome news for sellers of softwood lumber. Especially advantageous is the growing demand for single-family homes, the kind of construction that makes ample use of this key Canadian export, now one of the fastest-growing.
But the industry cannot expect to rely long-term on the U.S. for the revenue gains it needs to prosper. With protectionist sentiment on the rise south of the border and a new trade deal now in the works, risks are rising that could put a damper on the amount of wood Canada is allowed to export to the U.S. Even if negotiations go well, Canada will be best served in the long run by finding new ways to use its resources and new markets in which to sell them, industry experts say.
As in many sectors these days, innovation is key.
“We’ve actually been innovating so much that we like to talk about it as a transformation of the industry,” says Paul Lansbergen, vice-president of strategy, innovation and economics at the Forest Products Association of Canada in Ottawa. “Some of our traditional products are not going to prosper in the future — newsprint being a prime example — so we have to figure out what else to do with our wood fibre and how we can maximize the value of the wood fibre that we harvest.”
He believes success will depend on incremental improvements to and new applications for existing products, as well as on cutting-edge technologies being developed that will make it possible to refine wood into bio-chemicals and advanced materials now made from fossil fuels.
All these things will help make the industry more stable in Canada, as well as leading to global export opportunities that will make it less dependent on the U.S. Market diversification is actually already underway, he says.
Where are Canada’s exports going?
“We export now into almost 180 markets around the world,” Lansbergen says. “Yes, the U.S. is still the dominant market for us, but we want to reduce that dependence, and we’ve already made great strides. In 2005, the U.S. represented 80 per cent of our exports. In 2015, that was down to 68 per cent.”
According to Natural Resources Canada, Canadian forest industry products made their way to more than 176 countries around the world in 2015. In addition to softwood lumber and newsprint, Northern bleached softwood kraft pulp was a key export.
Of the $32.7 billion in exports in 2015, $22.1 billion went to the U.S. But shipments to Asia, mostly from B.C., have been on the rise. The industry sold $5 billion worth of products to China 2015, making it the Canadian industry’s second-largest export market. Japan was in third place at $1.4 billion in export sales, with South Korea 4th at $523 million. India, the U.K., Indonesia, Taiwan, Mexico and Brazil completed the industry’s top 10 export markets.
New market opportunities
The Canadian government is firmly behind the goal of finding new international customers for Canadian wood products. For example, there is NRCan’s Expanding Market Opportunities Program, which began as the Canada Wood Export Program about 15 years ago. Over the last several years the program has invested nearly $197 million to partner with forestry industry associations and provincial governments to bolster their export efforts. Among other activities, the funds have been used to establish and support offices abroad — a measure to support the all-important “boots on the ground” approach to export market development.
“Previously, associations would work independently and sporadically between markets,” says Robert Jones, a director at the Canadian Forest Service, an extension of NRCan that provides science and policy expertise and advice on national forest sector issues. “But one of the lessons we’ve learned over the years is that there’s no substitution for associations working together and having a continuous presence on the ground in emerging markets.”
China has been a major focus, where Canada has established offices in Shanghai and Beijing, employing close to 35 staff who are doing more than simply selling Canadian products. When China’s building boom began years ago, imported Canadian lumber was mainly used for concrete construction forms. By holding educational seminars about the benefits of wood-framed construction, encouraging universities to teach wood building design, and providing training to builders, Canada’s Chinese offices helped expand the uses and opportunities for Canadian wood products.
Jones says China is “a shining example” of where the program has worked well. While the Chinese economy is slowing down, there is still plenty of opportunity for Canadian companies to make inroads there. According to some estimates more than 100 million people will move to China’s urban centres over the next decade, increasing the need for housing and public buildings.
The Expanding Markets Opportunities program also supports an office with a staff of 15 in Tokyo, where the goal has been somewhat different. Because the Japanese are more accustomed to using wood in residential building, the Tokyo team’s recent focus has been on growing the wood market for use in non-residential buildings such as schools, hospitals and retirement homes.
Jones says Canada also sees potential in Southeast Asian countries including Vietnam, as well as in India and the Middle East.
Remaining competitive in the face of increased competition
Finding new customers in foreign markets isn’t Canada’s only challenge. Like most sectors of the economy facing increasingly competitive global markets, Canadian forest products companies also must work to remain relevant and keep customers happy.
According to figures provided by the Conference Board of Canada, industry profits declined by 2.7 per cent in 2015, as costs rose at a faster rate than revenues. While a big rebound in profits is forecast for this year, the 2015 dip highlighted the need for the industry to become more efficient and find new revenue streams.
“The industry has been thinking hard about new ways to use its resources,” says Michael Burt, the Conference Board’s director of industrial economic trends. “On the wood side of the business, a key constraint going forward is going to be access to timber supply.”
Canadian supply is being curtailed by various impacts including cutbacks in Quebec’s harvesting quotas, which were initiated to preserve the health of its forests. In the West, damage caused by the mountain pine beetle is expected to have claimed about half of B.C.’s pine trees by sometime next year.
To offset this supply crunch, technological advances are helping companies better manage forests and gain easier access to hard-to-reach areas for harvesting. The industry is also continuing to develop more sophisticated scanning technology that helps sawmills maximize cuts and get the most value out of each log.
Ongoing innovation in production processes is also yielding more power cogeneration, which holds down energy costs for producers, and allows some to sell excess energy back to the grid as a source of revenue.
Another example of the industry’s ability to adapt to changing realities is the successful manufacturing of wood pellets from wood waste and dead beetle-infested trees in B.C. These pellet-based fuels are selling well in Europe, where they are mixed with coal to reduce greenhouse-gas emissions in electricity generation.
Advances in engineered building materials are also expected to boost offshore sales.
“The building materials industry has come a long way from two-by-fours and MDF (medium-density fibreboard),” Burt says. “We are seeing new engineered wood products being designed, and there is a lot of experimentation right now.”
The hope is that new products such as cross-laminated timber, for instance — large prefabricated wood panels that are strong, lightweight and easy to install — will eventually make wood more of a construction choice in new markets. Experiments with so-called ‘tall wood’ buildings using this product are already underway in Canada.
While such innovations signal promise, capacity for manufacturing wood products is nearly tapped out in Canada, as companies have been buying plants in the U.S., rather than building them at home. This means that new investment will be needed if Canada is to take advantage of new opportunities, Burt says.
Meanwhile, NRCan is funding another program — Investments in Forest Industry Transformation, which was started in 2010 to help the industry become more competitive and environmentally sustainable. The program contributes 50 per cent of the cost for projects making use of new technologies. In the vanguard are innovations that could lead to wood pulp being used to replace fossil fuels in the production of all sorts of things not typically associated with trees including cement, car parts and methanol.
This industrial experiment involves the development of new biomaterials, such as strengthening additives and coatings for metal alloys to make trains, planes and cars lighter and more fuel-efficient.
But most of these cutting-edge technologies have yet to be commercialized and await more investment to become viable exports.
“Which innovation will be the one that takes off and when?” says Burt. “That’s the $64,000 question.”
That’s the $33-billion-plus question – one that will be answered only when it happens.