1. GENERAL ECONOMIC SITUATION - 200217
In the second half of 2002, Canada's economic growth eased from the very strong pace registered earlier in the year. Real GDP, after rising at an annual rate of 5.1 percent in the first half of 2002, is estimated to have advanced at a rate close to 3 percent in the second half.
With the significant monetary stimulus provided by low interest rates, household spending rose strongly in 2002. Expenditures by businesses on machinery and equipment also recovered significantly. Increased uncertainty about the economic outlook, however, held back the pace of non-residential construction and inventory accumulation in the second half of the year. Although growth in Canada's exports was robust through most of 2002, it appears to have eased towards year-end because of the slowdown in the rate of economic expansion in the United States.
Core inflation has been higher than anticipated in recent months. This reflects not only a stronger-than-expected increase in premiums for auto and home insurance, but also some broadening of price pressures resulting from strong demand in the economy. Based on the analysis of the inflation data and other indicators of pressures on capacity, the economy may be operating closer to its production potential than previously thought.
2. PERFORMANCE OF THE PAPER AND WOOD INDUSTRY - 2002
a. Consumption, production and trade
Canada's pulp and paper shipments rose 2.5 percent to 30.6 million tonnes, which contrasts with 2001s 5.7 percent reduction - the largest drop in 20 years. Shipments fell a further 4 percent in the first quarter of 2002 before stabilizing. The strongest growth came from shipments of printing and writing and packaging grades to North America and pulp shipments to Asia. Lumber shipments rose 0.5 percent.
When there are no US duties or quotas, lumber represents 30 percent of Canadian forestry sales by dollar value and 80 percent of lumber exports normally go to the US market, where they fill about one third of domestic demand.
Canadian exports in 2002 of market pulp rose by just over 2 percent. Canadian market pulp 2002 exports to the U.S (+0.2%) and Western Europe (-0.7%) were essentially flat. Canadian pulp exports to Japan fell almost 9 percent to just under a million tonnes, or 30 percent below 2000 levels. Conversely, Canadian exports to China rose a further 11 percent to one million tonnes, making China Canada's largest national market in Asia.
Canadian newsprint production and shipments were flat but showed year-over-year growth in every month after the first quarter as shipments to the United States rose 4 percent; Canada increased its US market share from 49 to 52 percent.
b. Financial performance
The Canadian forest products industry will have good reason to remember 2002 as a money-loser, but one that also underscored the industry's resilience. Based on preliminary estimates, the Canadian industry lost well over $1 billion, a reversal from the newsprint-driven $1.9 billion profit in 2001.
While there were profitable producers and profitable product niches last year, like plywood, tissue and personal hygiene products, the overall trends were negative: pulp suffered from weak global demand as most major economies stagnated. Newsprint and most other communications grades saw the downward price spiral that began in mid-2001 reach bottom in 2002. On an unweighted average, pulp and paper pricing was down about 10 percent last year. By year-end, some paper grades were sustaining small price increases. Small increases are pending for pulp.
Punishing US tariffs on softwood lumber dealt a blow to the fortunes of Canadian producers. Despite these challenges, or perhaps because of them, Canada preserved and in some cases enlarged its US market share. The US duties even caused Canada's lowest-cost lumber operations - already among the most efficient in North America - to find resourceful ways to further lower costs.
In 2002, the pulp world fell back into a semblance of geographic balance although average prices remained depressed. New York spot prices for NBSK pulp ended 2002 roughly where they began at about US$480 per tonne, after peaking during the summer at US$510.
Paper producers, more focused on North American markets that market pulp, saw enough supply/demand improvement to begin anticipating recovery. Newsprint producers phased in a US$50/tonne increase in the second half of 2002. The New York spot price that had peaked at US$625 in April 2001 bottomed at US$445 last summer and recovered to US$480 by year-end.
c. Outlook for the future
The lumber sector is just hoping to be part of a market-driven economy again, hopefully before mid-2003 so it can have an influence on pricing, especially if the US housing demand remains strong. While the US housing market might be expected to see a breather, current low interest rates virtually assure that housing demand - and hence demand for wood construction materials - will remain brisk.
A sustained recovery in paper markets requires a broad economic upturn. That recovery is now expected to begin in earnest this year and carry over to 2004, which promises to be the next peak year for pulp and paper especially in North America. For Canadian market pulp, some price recovery is taking shape, though export markets like Germany and Japan may not experience economic recovery until 2004.
3. ISSUES OF PARTICULAR INTEREST
a. Illegal logging
On 5 June 2002, the Board of the Forest Products Association of Canada adopted the International Council of Forest and Paper Association's statement on this subject (see Annex).
b. Environmental aspects
If Canada in general had the Canadian forest products industry's record on greenhouse gas reductions, the country would have met its Kyoto commitment a decade ago. Having lowered carbon dioxide emissions by 26 percent since 1990, while increasing its production by 25 percent, this sector is finally being recognized as a strong leader in reducing greenhouse gas emissions.
More fuel substitution - Over the past decade, the forest products sector moved biomass, or wood waste, to the top of the country's renewable fuels list. This greenhouse gas friendly fuel now provides 57 percent of the pulp and paper industry's fuel. Mills switched from coal and bunker oil - heavy CO2 sources - to cleaner natural gas or renewable biomass. More substitution is possible if the right incentives are provided to promote climate-friendly fuels and technologies. The industry is also a major player in cogeneration, with many more projects planned or possible. Mills purchase steam from third party operators or generate electricity internally by using process steam to power turbo-generators.
Process modernization - New process technologies, from little pumps to big wood dryer systems, power boilers or paper machines are invariably more energy efficient than the equipment they replace.
Energy auditing and aggressive maintenance - Energy auditing is helping uncover incremental energy savings that can be achieved through preventive maintenance.
Carbon sequestration - Canada's deforestation rate is zero and Canada's forest volume is increasing, not decreasing. Growing forests absorb more CO2 than mature ones - a tree can be up to 25 percent carbon - another reason why Canadian governments require prompt regeneration of all harvested areas. There is considerable potential to increase this net carbon sequestration through improved silviculture and forestry methods, tree plantations and afforestation on marginal farmland. In 2000, the Alberta Pacific pulp mill near Boyle, Alberta, began a tree plantation program that could sequester half a million tonnes of CO2 by 2004. By planting fast growing hybrid poplars on 23 600 ha (58 300 acres) of reclaimed agricultural land through 2019, the Al-Pac mill also adds an excellent fibre source in close proximity to its operations.
c. Progress in sustainable forest management and certification
In January 2002 all the members of the Forest Products Association of Canada (FPAC) made a commitment to be third-party certified to a forestry-specific standard by the end of 2006. FPAC is the only national association among forest nations to require this as a condition of membership. FPAC members are responsible for three quarters of Canada's multi-use working forests. By the end of 2006 FPAC members will have certified an area the combined size of Sweden, Finland and Norway to an internationally recognized forestry standard: Canada's National Sustainable Forest Management Standard (CSA), the Forest Stewardship Council (FSC) or the Sustainable Forest Initiative.
Third-party certification is more than a tool to reassure customers and maintain market access. The imprimatur of third-party certification builds trust with other stakeholders. Becoming a certified operation improves discipline and performance on the ground, reinforces employee morale and community relations, and of course, promotes sustainable forest management.
The current area of third party verified forest certifications in Canada, including ISO 14001 certifications is 116 million hectares; excluding ISO 14001 it is 25 million hectares.
ANNEX
INTERNATIONAL COUNCIL OF FOREST AND PAPER ASSOCIATIONS STATEMENT ON ILLEGAL LOGGING*
The International Council of Forest and Paper Associations (ICFPA) represents national organizations whose members produce paper and wood products. The organization members of the ICFPA promote sustainable forest management and sustainably produced forest products to meet society's needs. The forest products industries ICFPA represents support high forest management standards around the world and are committed to using forest management and manufacturing practices that meet environmental, social, and economic objectives.
Illegal logging
The issue of forest crime and forest law enforcement has been the focus of international governmental, non-governmental and industry discussions in recent years. Illegal logging not only contributes to deforestation but also undermines the viability of legally harvested and traded forest products and is a serious detriment to forest sustainability. The environmental destruction caused by illegal logging creates negative perceptions of the forest products industry in general and the ICFPA commits to work with all interested groups to find solutions to this growing international problem.
Acknowledging that forest law enforcement is the responsibility of domestic authorities and addressing it at international level raises issues of national sovereignty and interpretation, ICFPA members may develop country-specific approaches to address the question of verifying legality in timber trade. However, the ICFPA is unified behind the following principles:
• Encourages sustainable forest management according to internationally agreed principles. Acknowledges that voluntary and market-driven certification systems can partially address the problems associated with illegal logging. The private sector must be vigilant in situations where illegal logging is suspected and all levels of government must work to enforce laws established to prevent it.
• ICFPA strongly supports the conservation of forest areas which have been designated for protection by law. ICFPA encourages governments and the private sector to work together to end all illegal logging from areas where timber harvesting is expressly prohibited.
• ICFPA members commit to abide by domestic and sovereign laws pertaining to logging and harvesting in any country where logging and tree removals take place.
• In countries where such laws are not in place, we support the establishment of laws and regulations that promote and advance sustainable forest management and their subsequent enforcement.
• ICFPA supports government monitoring and assessment of forests as essential to devising appropriate and effective measures to counteract illegal logging and trade of illegally harvested wood. Accurate and reliable information will greatly improve the ability of government and private landowners to curtail illegal activity.
The ICFPA associations commit to conduct consistent with these principles.
* The Board of the Forest Products Association of Canada approved this statement on 5 June 2002.
17 Source: Bank of Canada Monetary Policy Report Update, January 2003