Domtar to Cut 1,800 Jobs, Close Some Mills

November 30, 2005 11:31 AM ET | Associated Press

MONTREAL (AP) - Canadian paper-maker Domtar Inc. is cutting 1,800 jobs and plans to close or sell several mills as part of a plan to steer the company back into profitability amid a downturn in the paper industry.

Montreal-based Domtar said Wednesday it expects to permanently shutter its mill in Cornwall, Ontario, and parts of its Ottawa, Ontario, mills. Under the plan, Domtar also would sell its mill in Vancouver, British Columbia, and shut its sawmills in Grand Remous and Malartic, Quebec.

The Cornwall cuts include 390 positions already eliminated in December 2004. The Cornwall mill is the largest to be closed, with 910 workers and a total capacity of 265,000 tons of uncoated and coated printing grades on three paper machines

Domtar is North America's third-biggest producer of free sheet paper, which is used for photocopying, as well as a major producer of other business papers and lumber products.

As part of the plan, the company's North American administrative offices will be consolidated in Montreal and Cincinnati, and Domtar will overhaul its supply chain. In all, the measures will result in pretax restructuring charges of $505 million, the company said.

"Unfortunately, sustained actions and dedicated efforts by our employees, as well as capital investments by the company, were not sufficient to guarantee the long-term viability of these operations within Domtar," Chief Executive Raymond Royer said in a prepared statement.

Employees affected by the cuts will receive financial assistance and be offered access to job-search services, Royer added.

Domtar's cuts follow similar moves by a number of other paper and lumber companies in recent months as they cope with rising energy costs and weak markets. For example, Atlanta-based Georgia-Pacific Corp., maker of Brawney paper towels and other products, said in October it would cut 1,100 jobs worldwide and 850 in North America in a broad restructuring that aims to save $100 million a year.

Domtar also blamed a stronger Canadian dollar, which has made its products more difficult to sell in the key U.S. market.

"The strengthening of the Canadian dollar has pushed some of our Canadian mills to negative cash-flow generation and we must focus on our most efficient mills in order to return to profitability in the foreseeable future," said Richard Garneau, executive vice president of operations. The strategy should improve cash flow by $160 million, he said.

Last week the forestry giant abruptly shut down its Lebel-sur-Quevillon pulp mill in northwestern Quebec, cutting 425 jobs. It cited rising costs and weak markets for pulp. The company warned last month it was considering closures as it posted a loss of $52 million in the third quarter. Domtar also canceled its dividend.

Domtar has 10,000 employees across North America and owns 50 percent of Norampac Inc., Canada's largest cardboard producer, which also reported a third-quarter loss -- of $11 million.

Domtar also said it has amended its credit facility, which matures in 2010, "to improve financial flexibility." The new arrangement includes a maximum debt-to-capitalization ratio of 60 percent and reduces the company's credit line by $100 million to $600 million.

U.S. shares of Domtar fell 8 cents, or 1.5 percent, to $5.24 in morning trading on the New York Stock Exchange. The stock has traded in a 52-week range between $4 and $12.64. (*)

Cascades shuts down Thunder Bay fine paper mill

Another hit to Northern Ontario’s forestry industry...

By Peter James | Kenora Daily Miner and News | Wednesday November 23, 2005

Northern Ontario’s forest industry took another big hit Tuesday as Cascades announced it is shutting down its Thunder Bay fine paper mill.

“This is starting to get scary,” Kenora Mayor Dave Canfield said, when reached at the Association of Manitoba Municipalities Conference in Brandon.

The shutdown is the latest in a long line of cutbacks and mill closures that have hit workers and communities across the region in recent months.

Cascades hinted earlier this fall the Thunder Bay mill was on shaky ground. Originally they had planned to shut down one paper machine and cut 150 jobs. Now they’ve decided to close the doors completely, putting an additional 375 people out of work.

“The sad truth is this isn’t going to end anytime soon,” Communications, Energy and Paperworkers Union Ontario vice-president Cecil Makowski said of the closures of mills across the north.

Makowski said Cascades decision to shut the mill comes at a strange time considering the federal government is set to announce an aid package for the sector. But speaking on CBC Radio Cascades spokesman Hubert Bolduc said he expects the federal package will be targeted more towards the sawmill sector.

Ontario NDP Leader Howard Hampton put the blame for the closure on the provincial government’s energy policies. He said other challenges the industry is facing, like falling prices and a rising Canadian dollar are the same across Canada, yet Ontario firms also have to deal with higher costs for electricity. “As long as that disparity continues more Northern Ontario paper mills will be pushed over the edge,” he said.

The closure of the mill should signal that the provincial government needs to do more to help the industry or the whole region will suffer, Canfield said. Thunder Bay’s economy will suffer the biggest blow as they will lose not only the mill but also any associated jobs.

“They are the service centre for the industry,” he said.
Makowski said the mill jobs are even more important because they’re difficult to replace. “When it closes you lose primary employees. You can’t absorb those jobs anymore,” he said.

Bowater’s Thunder Bay mill, already on shaky ground, could also be affected by the Cascades closure. Makowski said Cascades buys market pulp from Bowater. “It’s tightening the noose around that mill,” he said.

There is plenty of uncertainty about the future of other Thunder Bay mills. Abitibi-Consolidated still has its Fort William mill and the associated timberlands on the selling block. “We are expecting that the sale process will be completed by the end of the year,” company spokesman Denis Leclerc said.

In Kenora the Devlin Timber mill closed in February and the Abitibi-Consolidated mill hasn’t been making paper for a month and the long-term future is still up in the air. (*)

Thunder Bay: 40 mill jobs axed

From the Chronicle journal (Thunder Bay, Ontario)

Regional News | By BRYAN MEADOWS | Nov 15, 2005, 22:40

Another wave of layoffs is coming in the perfect storm facing Northwestern Ontario’s forest industry. Citing high energy and wood fibre costs, Weyerhaeuser will permanently shut down the round-wood processing plant at its Dryden paper mill on March 31. About 40 employees will lose their jobs — 35 in the mill and five in contract harvesting operations — when the wood-room closes. Mill management told employees of the closure Monday morning.

Weyerhaeuser vice-president of Ontario operations Norm Bush said the action comes in the face of rising costs, a rapidly appreciating Canadian dollar, declining demand for fine papers and industry oversupply.

“This is one step in our drive to reduce our delivered fibre costs,” Bush said, explaining that current technology allows wood chips to be delivered to the mill for about the same cost as delivering an unprocessed log, which then requires chipping in the wood-room.

In addition, he said, concerns about chip quality have been addressed by new technology used in on-site wood-chipping equipment in the bush.

The layoffs come as Dryden continues to battle economic and social demons from a restructuring exercise at the local mill two years ago that chopped more than 385 workers.

“It’s a sad day for our community,” said Dryden Mayor Anne Krassilowsky. These cuts, she said, “compound the effects on everyone in the community as well as individual families. It causes a chain reaction across the community (with far-reaching effects on) individual homes, businesses and tradespeople.”

“I’m disappointed in the provincial government for not taking the necessary steps” to prevent further forestry job losses, Krassilowsky said. “The provincial government is missing in action.”
NDP Leader and Kenora-Rainy MPP Howard Hampton agreed. “The McGuinty government has done nothing to reduce the high electrical and wood fibre costs” crippling the forest industry.

While the government claims only older, smaller newsprint mills are shutting down machines and laying off people, Hampton said the Weyerhaeuser mill is perhaps the most modern in Ontario, and it produces fine paper.

“It shows the McGuinty government is wrong again,” he said, adding the plant closure is at a mill that’s modern and owned by a company that has invested millions on infrastructure, “yet it is being forced to the wall.”

Communications, Energy and Paperworkers Union spokesman Cec Makowski called the province’s inaction “a travesty.” “To date nothing substantial has been done to reduce the cost of delivering fibre to the mills,” he said. “It’s the workers who continue to pay the price of this inaction.”

Weyerhaeuser spokeswoman Bonny Skene said the province needs to do more to help the industry become more competitive. “We’re calling on the province to focus on fibre costs and make them competitive . . . (and) we have asked them to reduce fibre costs (immediately) by at least $5 per cubic metre.”

Skene said the forest industry aid package reduced fibre costs by only 78 cents per cubic metre, while the global and Ontario “gap” in costs is about $20. The average cost of wood delivered to Ontario mills is about $55 per cubic metre while the global cost averages to $35.

The wood-room closure had been the subject of speculation in the community over the past few weeks, and it was tied to a rumour that the mill’s finishing room was also facing the axe. Skene refused comment on the finishing room.

“We’re looking for all cost reduction opportunities that are within our control,’’ she said. “We have cost reduction teams in place throughout the mill.”

In the 2003 restructuring exercise in Dryden, Weyerhaeuser closed its studmill and chopped the workforce at its pulp and paper mill by about 25 per cent, citing factors including high manufacturing costs, overcapacity in lumber production in North America, the rising Canadian dollar and the impact of U.S. duties on Canadian softwood.

© Copyright by Chronicle journal.com

Loonie looms large as forest sector deals with junk ratings

By HARRY KOZA | Friday, November 11, 2005 | Globe and Mail

Shed a tear for the vanishing Canadian lumberjack. It's tough work in the woodlot at the best of times, and these days, what with the strong Canadian dollar, softwood tariffs, and soaring energy costs, companies that employ lumberjacks are in rough shape.

It's not a sector that I usually pay a lot of attention to, as most of the bonds issued by domestic forest products companies are U.S. dollar-denominated high-yield debt, and we seldom see any of it trade up here in the Great White North.

Still, the papers are full of the travails of the forest sector lately. Jobs are being clear-cut, stock analysts are doing the earnings-estimate limbo every quarter (How low can they go?) and politicians are promising new subsidies and handouts and rattling their, er, chainsaws. As if any of our Solons in Ottawa knows one end of a chainsaw from the other.

Actually, that's something I'd really like to see: Paul Martin down in Washington to talk to the U.S. Senate about softwood lumber and he puts on a goalie mask and fires up the old McCulloch and cuts the podium in half. That'd get their attention.

Anyway, I hadn't realized just how sweaty the bonds issued by forest companies are getting these days, but then I looked at a Canadian forest industry report card that the credit boffins over at Standard & Poor's released this week. If this was your kid's report card, little Johnny would be permanently grounded, and you'd be considering sending him to military school.

S&P rates 13 Canadian forest firms and four building materials companies. Fifteen out of the 17 companies are rated as junk -- or non-investment grade. Of the forest firms, two are triple-B, which is the low end of investment grade; four are double-B-plus, which is the high end of the junk spectrum; one double-B, two double-B-minus, two B-plus, one B, and one triple-C-plus.

Even worse, eight of the companies have negative ratings outlooks, and none of them have positive outlooks. The best that bondholders can hope for is that the companies' credit quality doesn't get any worse. It's like your doctor telling you there's good news and bad news: The bad news is that you are sick as hell and not getting any better, and the good news is, at least you aren't getting any worse.

Yet the individual company ratings are a litany of the same endemic problems: "credit metrics remain stretched as the appreciation of the Canadian dollar and rising energy costs will hurt earnings." ". . . energy and resin costs have increased." " . . . remains under pressure from the Canadian dollar and energy costs." ". . . continues to face a strong Canadian dollar and rising energy costs." ". . . compounding the problem is the rising Canadian dollar and energy costs" ". . . cost reduction initiatives . . . are absolutely critical for long-term survival." Gee, I'm beginning to see a pattern here.

The big burden for these companies has been the loonie. Most of the industry's costs are in Canadian dollars, and most of their revenues are in U.S. dollars. For pulp and paper companies it's an even more bitter pill: While pulp and paper prices, denominated in U.S. dollars, have been rising for more than two years, the appreciation of the Canadian dollar has wiped out the gains.

That's really harsh -- you're in a cyclical business and when the up-cycle comes, it still isn't enough to cover your currency losses. In Canadian-dollar terms, prices have gone nowhere.

It gets worse, though. Energy costs have risen too, for oil, gas, and -- especially in Ontario -- electricity. That's had a nasty impact on direct costs, but it has also raised costs for freight, chemicals and resins.

Meanwhile, the softwood lumber dispute goes on and on and on, despite the macho posturing and tough talk from Ottawa. It's about $5-billion in duties, and counting. If that ever gets resolved, the return of those duties will be a shot in the arm for a lot of these companies. But no one can predict how long it will take before any refunds are forthcoming, and the dispute continues without any resolution, so we could be talking geological time here, folks.

There's a couple of other fundamental problems with the industry, too. One is a lack of pricing power. Costs rise, and the companies can't raise prices to cover them, because there is too much overcapacity. And every year, they have to haul the logs further to the mill.

S&P says these conditions will continue, and thus credit quality will "decrease in the near term." Gee, if you're already rated triple-C-plus, any further decrease in credit quality will put you in receivership.

Maybe it's high time someone does put on a goalie mask and trims a few slabs off the West Wing.

Harry Koza is senior Canadian markets analyst at Thomson Financial and a columnist for GlobeinvestorGOLD.com.

Interview: Frank Dottori, Tembec

Out of the fire

By GORDON PITTS
Tuesday, November 8, 2005 Posted at 11:51 AM EST
From Friday's Globe and Mail

For 32 years, Frank Dottori, CEO of Tembec Inc., was the growth-happy warrior of the forestry industry, creating a diversified, billion-dollar company from its roots in an employee-owned pulp mill in Temiscaming, Quebec. At the end of this year, the 66-year-old onetime engineer will step aside for veteran company executive James Lopez. Dottori leaves a debt-laden company reeling from the high Canadian dollar, new competition and U.S. lumber duties that, he says, have cost Tembec $300 million. Still, Dottori remains unrepentant about his aggressive strategy for growth.

Did you expect to leave when the company was doing poorly?
No, I didn't, but this is a cyclical business. I think this particular decline turned out to be significantly worse than anticipated. It's now going into its fifth year; it normally lasts three years. There are some new factors, particularly in the pulp business, which has been hit the hardest. It's an issue of Third World production becoming about the same size as Canadian production, and therefore a major factor in global pricing.

You've been depicted as someone who adheres to a strategy of growth at all costs. Is that fair?
I don't think we've bought anything that doesn't fit in strategically, contrary to what some analysts have written in the past. There was criticism levelled at us when we bought some sawmills two to three years ago. But we said this is a business that we have to look at long-term, and ensure our wood supply. Today, we're lucky we bought these sawmills.

Do you find the criticism hard to take?
That's one of the negative sides of our business. At one time, it was more of a long-term thing: You invest in multimillion-dollar projects, which can only be done with 10- and 15-year horizons. But most mutual fund investors are thinking quarter to quarter. That's incompatible, especially in a cyclical business. So I think you'll see a lot of companies go private.


Will you still stay on as a director of the company?
As the founder of the company, and as a fairly dominant, opinionated type of personality, I think my presence as a director would create undue stress on the new CEO. I just think this makes it clean cut. It's his show now, but if he wants any advice, he can call me.

What will you do with your time?
I bought a cottage recently, and rebuilding it should keep me busy for six months. I get requests to sit on voluntary boards. So I think I'll do a couple of those things, and maybe a few corporate directorships.

You have been called a genius at employee buyouts. What was your best deal?
Along with its employees and townspeople, we bought the Spruce Falls, Ontario, newsprint mill in 1991; that was a hell of a good deal. At the same time, we were taking tremendous criticism on the pulp side, which was doing terribly. So I had a split personality--half of me was bright and half of me was dumb.

Does employee ownership still work?
You can't ask your employees to be loyal to the company and make the extra effort unless you do something to protect their jobs and their security. Today, with this ruthless competition, it's tough saying, "I'm going to eliminate 30% of the jobs and I want you guys to keep working hard and be loyal and make an effort." And they're going to say, "Why don't you protect our jobs?"

But hasn't Tembec embarked on aggressive cost-cutting measures?
Yes, but there has never been anything like a Friday afternoon where we go whack. I think it's part of the culture of Tembec, that if we do good planning and use attrition, we shouldn't have to do it on a Friday.

Do you have any regrets?
Three to four years ago, we were trying to make some significant mergers and acquisitions, but I succumbed to public pressure. If we had just gone ahead and done a few of the transactions, we would be the biggest wood fibre company in Canada. I think if I had a bit stronger character and marched on, and said the hell with the analysts and the hell with the worrywarts, we'd be an extremely successful company, and I'd be sitting here today at the top of the heap.

Pine beetles march on, despite rigorous effort

By MARK HUME
Wednesday, November 9, 2005 Page A2 | Globe and Mail

VANCOUVER -- Using methods that seem designed to battle an invading army, government officials in British Columbia and Alberta have been burning forests along their shared border in an attempt to stop a massive infestation of pine beetles from spreading eastward.

But despite the extreme measures, which this fall included the destruction of about 5,000 trees in Willmore Wilderness Park, about 150 kilometres north of Jasper, the pine beetle has rapidly been making inroads into Alberta, jumping from B.C.'s lodgepole pine to the jack pine of the boreal forests.

The insect has been slipping through mountain passes from the Peace River country, in northern British Columbia, to the Bow Valley, west of Calgary.

With more than 3,500 infestation spots now identified east of the Rocky Mountains, which long served as a natural barrier to the insects, the way seems clear for an outbreak in the northern boreal forest, which reaches from British Columbia to Labrador.

Scientists say the beetle, which leaves valleys of dying, red trees in its wake, is spreading because global warming has reduced the winter cold snaps that used to kill off the insect.

The leading edge of the mountain pine beetle infestation moved into the Peace River district in 2002, where it is now well established, said Allan Carroll, a scientist with the federal Pacific Forestry Centre in Victoria.

"The bulk of the population has breached the Rocky Mountain barrier," Mr. Carroll said in an interview yesterday. "It comprises several thousand spot infestations, all of which have become reasonably well established and have been growing since their arrival. . . . It's quite worrisome because we have this large population sitting now adjacent to the most logical corridor into the boreal forest."

In Alberta, officials have deployed aerial surveys, ground patrols and rapid-response teams to cut and burn trees infested with mountain pine beetles. But Mr. Carroll said the insects are almost impossible to eradicate.

"We certainly have every reason to think we can slow it, but stopping it is difficult," he said. "Once it becomes established in a pine forest, it becomes a part of that ecosystem and can exist at extremely low levels, levels that we are pretty much unable to detect. It remains at background levels until conditions arise that allow it to erupt."

Some researchers warn that the pine beetle could spread through Canada's boreal forest and across North America.

"If mountain pine beetle is successful in colonizing jack pine, there is a continuous connection of suitable host species across the boreal forest, down the East Coast of the United States all the way to Texas. What we are describing here is a potential biogeographic event of continental scale with unknown, but potentially devastating, ecological consequences," researchers Jesse Logan, of the U.S. Forest Service, and James Powell, of Utah State University, said in a recent paper.

The scientists said the scale of the outbreak in B.C. is "truly astounding."

Across the Prairies, resource managers are taking note.

Rory McIntosh, forest insect and disease specialist with Saskatchewan Environment, said his province has been anticipating a possible pine beetle invasion for years. "We are very concerned about this. It's certainly a major item on the agenda at the provincial and national level."

In a few weeks, he said, signs will be going up on major highways along the border with Alberta, urging people not to import into Saskatchewan any wood with the bark still in place.

Mr. McIntosh said if an infested forest spot is detected "we would do an immediate cut-and-burn, and we'd cut 50 to 75 metres into the edge of the forest around that."

That's the kind of rapid response Alberta has been using - swooping down on wilderness valleys to cut and burn any infected trees they find.

In B.C., the outbreak covers more than seven million hectares and has cost the provincial economy an estimated $6-billion. In Alberta, more than two million hectares of pine forest are at risk along the eastern slopes of the Rockies, with an estimated commercial value of $23-billion.

Selective logging, if done properly, not destructive: Proper logging techniques should be applied in the Amazon

Rome, 3 November 2005 - Selective logging is not necessarily destructive and can be done with low impact on the remaining forests, if the proper techniques are applied, FAO said today, in response to a recent study on logging impacts in the Amazon.

Researchers at Stanford University have recently been successful in developing sophisticated methodologies and in applying them on satellite data from the Amazon to show the extent of selective logging in the forests, which had previously been missed in other assessments.

"The approach developed by the researchers helps to monitor the impacts of logging in the Amazon and shows us where forests are harvested unsustainably. However, selective logging is not in principle that destructive. Sound logging practices allows the use of the forest without losing it or risking its regenerative capacity," said Wulf Killmann, Director of the Forest Products and Economics Division at FAO. "The severe logging damage shown in the study is unacceptable and sustainable logging practices should be applied."

Reduced Impact Logging

Good forest harvesting practices or so called reduced impact logging should be applied when logging, according to FAO. By using reduced impact logging, forests can be harvested while providing economic benefits as well as protecting the soil, water and biodiversity.

Reduced impact logging refers to widely-accepted practical steps to be taken when logging. It includes specific measures such as assessments before and after harvesting, careful construction and maintenance of forest roads, and cutting down trees at a certain direction and of climbing vines.

According to a global study carried out by FAO, the University of British Columbia and the Lakehead University in Canada, reduced impact logging, if done properly, reduces not only disturbance to the remaining tree stand but also logging waste, compared to other conventional practices.

"Selective logging can sustainably deliver timber with minimum detrimental impact on forests. If forests do not generate income, forest owners tend to convert it to other land uses, which is worse than selective logging." Killmann said.

To help implement reduced impact logging, FAO developed together with countries, regional and national codes for forest harvesting for Asian and African countries. A regional code is now underway for the tropical rainforests of South America, including the Amazon.

See Also...

    * Reduced Impact Logging Web site

      http://www.fao.org/forestry/site/1980/en

Exploring the elusive hydro question

Recent announcements by the provincial government on the fate of the coal-fired electricity-generating plants in Atikokan come on the heels of major layoffs taking place in the forestry industry, adding to an already precarious economic situation in northwestern Ontario. While there are many reasons for the decline in an industry that provides over 40 per cent of the jobs in this region, one that has been cited over and over is the increasing cost of energy. In fact, hydro costs in this region are now some of the highest in North America. In this article, I will attempt to put into perspective what is now becoming a Hydro Saga for the Northwest.

Ontario Hydro was built on the concept of providing power at cost to the people and industries of this province. This combination has fuelled the engine of the Ontario economy for over a century, helping make it the most prosperous province in the country. Environmental concerns, inflationary pressures, government changes and a host of other factors prompted a re-evaluation and a policy change. Ontario Hydro was split into separate business units and eventually started moving towards privatization.

The deregulation of the electricity market was part and parcel of the previous provincial government’s plan to privatize what once was a monopoly. This change was not only driven by the government’s philosophical bent towards privatization, but also by the thinking that permeates large sector industries and that has led to deregulation in the whole field of energy (oil and gas industries).

This thinking is based on the premise that competition and market forces alone will maintain a balance between supply and demand and produce efficiencies sufficient to provide a reasonable rate of return to investors while maintaining competitive rates to consumers and industry. While this ideology sounds great in theory, the reality is quite different. To dispel the notion of a well-balanced free energy market environment, it is sufficient to point out to the skyrocketing cost of natural gas and gasoline all over North America. And that’s not to mention the price fixing fiasco in the hydro market in California just a few years ago that almost bankrupted one of the richest American states.

The former provincial government found out the hard way that such a move was full of dangers for both the consumer and the economy (not to mention their own political future), and froze the rates once prices went through the roof right after deregulation was implemented. The new provincial government seems to have learned only part of the lesson, and in its eagerness to appeal to the environmentalist-minded voters last month announced that it is moving ahead with the shut down of the coal-fired generating plants by 2007.

As a budget co-ordinator for Ontario Hydro-Northwestern Ontario Region from 1987 to 1995, I watched a sequence of provincial governments (Liberal, NDP, Conservative, and now Liberal again) take this crown corporation from its stated objective of delivering power at cost to an instrument of social policy, to full deregulation, and now to a mix of private-public utilities.

Each new vision supposedly implemented to correct the flows of the previous one. The most recent based on the premise that a mix of regulated and free-market prices will provide the best protection for the consumer.

So what does this mean for the average consumer and business who wants nothing more than a stable and fair pricing structure?  According to a market surveillance report by the Independent Electricity Market Operators (IMO), Ontario’s electricity system is facing insufficient capacity and ability to supply power at a time of growing demand. If this situation is not corrected quickly, “Ontario could be facing even more serious reliability problems in the near future, leading to the possibility of supply interruptions and continued upward pressure on prices during period of peak demand.” In fact, this summer industrial and commercial users in northwestern Ontario have been paying exorbitant prices (at imported costs) due to extremely high peak demand down east, while this region has been producing more power than it needs. And they want to shut down fossil fuel generation that provides 26 per cent of the total supply in Ontario?

What will that do to prices in the future?

While the debate on whether Hydro One should remain completely in public hands or move towards privatization will continue, the mix of supply and demand as well as other global changes will be shaping electricity and energy markets for years to come. The way this province and region respond to such events will also have serious implications for our economic wellbeing. In the next article I will highlight the proposed changes and its implications for northwestern Ontario.

Frank Pullia is a Certified Management Accountant (CMA), Principal of Pullia Accounting & Consulting and a former city councillor. He can be reached at 767-6579 or via e-mail atfrank@frankpullia.com

Forestry companies heading into perfect storm

By ERIC REGULY | Saturday, November 5, 2005 | Globe and Mail

American airlines and the Canadian forest products sector have, sadly, a lot in common. Both industries suffer from a capacity glut, brutal competition, legacy costs, waning pricing power, rising energy prices and sinking demand for some products. Four of the Big Six airlines, including Delta and United, are dealing with the grim reality in the bankruptcy courts. You have to wonder whether the same fate awaits some of the forestry firms.

Canada's oil, rocks and trees economy is running on two of three cylinders. The trees are sputtering out, especially in Eastern Canada. The share prices of Tembec, Domtar and Abitibi-Consolidated have fallen between 50 and 70 per cent this year alone. Dominion Bond Rating Service this week downgraded the debt of Domtar and Abitibi. Domtar just killed its dividend and Abitibi may be next. Tembec is a rotting stump of a company and is in danger of becoming a penny stock.

Buying opportunity? Companies in crisis are sometimes worth a flyer.

Samuel Johnson said: "The prospect of hanging tomorrow focuses the mind today," and forestry company bosses are doing a lot of focusing. Surplus mill capacity is being shut down. Assets are being sold to reduce debt and buy time with nervous bankers. Higher-margin products are being pumped out.

But judging from the deteriorating financial performance of the companies, the reshaping isn't happening fast enough. Things are more likely to get worse before they get better, especially if the Canadian dollar keeps rising and energy prices, which have come off their peak, reverse direction.

Forestry companies, especially of the Canadian variety, are complicated beasts. Like French auto makers after the Second World War, some began life as instruments of social policy. Job One was to keep northern towns alive; Job Two was to turn the brutal art of killing trees into a profit machine. Job One hasn't completely vanished from their DNA.

Politicians put pressure on them to keep mills going and use tax incentives to sweeten the argument. The companies are often slow to respond to obvious signs of excess capacity. Sometimes managers know they have to close a mill but wait for a rival to move first -- and wait and wait in a damaging game of brinkmanship.

The other complicating factor is the sheer range of products, from newsprint and ground wood papers to pulp and paperboard. Want to dull up your dinner party? Talk about lignosulfonates, better known as tree-sap chemicals, to those lacking PhDs in tree engineering. A lot of the products can be out of favour at once, with dire results. Newsprint is a fine example of relentless decline. Tembec makes it. Abitibi is the continent's biggest newsprint maker.

The newspaper you are holding may not exist in a decade as more and more readers migrate to the websites. Readership and circulation apparently are in irreversible decline as competing media become more popular. In the United States, circulation has dropped by about 1 per cent a year since 1990, in spite of the big rise in the number of households. In 1950, more than 120 per cent of households bought a newspaper (that is, some households bought more than one paper). Today, only about half of households take papers. Junior is plugged into his iPod; papers are so uncool if you're under 30.

As a result, total North American newsprint consumption has fallen from about 11.7 million tonnes in 1994 to 9.5 million tonnes. Newspapers are not only getting fewer in number and smaller in size, they're also using paper that weighs less. The circulation scandal in the United States, in which certain titles allegedly inflated their numbers, hasn't helped the case for papers as mass-market advertising vehicles. The Newspaper Association of America has forecast a 1-per-cent drop in ad linage this year even as the U.S. economy expands at an impressive rate.

Abitibi and Tembec have been reducing capacity as demand falls. Newsprint prices have gone up recently, but are still well below their mid-1990s peak. The truth is newsprint is in slow, steady decline and the survivors will have to find something more valuable to produce. Abitibi is pushing hard in "equal offset" paper, used in reference and instruction books such as the Dummies guides. The market for such paper is growing. There is no guarantee it will turn around the newsprint maker's fortunes.

The eastern forestry products companies face something close to the perfect storm. They are getting clobbered by the rising Canadian dollar (60 per cent of Abitibi's production is in Canada). Oil prices, while down in recent weeks, are still about $20 (U.S.) a barrel higher than they were a year ago. Profits are vanishing, liquidity is becoming an issue and deals are being done out of apparent desperation. Abitibi has sold its stake in PanAsia Paper, bought only two years ago and touted as its most promising growth asset, so it could pay down debt.

The time will come when the stocks will look attractive again. It's not now.

ereguly@globeandmail.ca