coastal vision document

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Embracing a new visionREBUILDING BC’S COASTAL FOREST INDUSTRY



BC COASTAL FORESTS

BC’s Coastal forest region consists

of 20 million hectares of the most

productive forest land in Canada.

CONTENTS

A Time for Vision, A Time for Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Beyond the Myths: The Reality Facing the Coastal Forest Industry . . . . . . . . . . . . . . . . . . . . 4

What Could the Industry Look Like – The Vision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Final Thoughts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Embracing a new vision – Rebuilding BC’s coastal forest industry 1



A Time for Vision, A Time for Action

ONE OF BC’

S PRIME ECONOMICGENERATORS IS IN A FIGHT FORITS VERY SURVIVAL

The BC Coastal forest industry contributes about $4 billion in wages and benefits to workers and families and more than $2 billion in tax revenue to various levels of government.But few people realize the industry is in a steady downward spiral that began more than 15 years ago.

The most recent wave

of layoffs in logging

and sawmills is a

symptom of a structural

problem that is not

easily solved. The

challenges are many

and complex. The

highest costs in the

world. Unreasonable

trade barriers. Restrictive operating

regulations. Rapidly changing market

characteristics. Continually evolving

customer and consumer expectations.

Outdated and excess equipment and mills.Increasingly aggressive foreign competition.

Any one of these would be an economic

blow for any industry.

To be sure, some progress has already been

made to reposition products, like hemlock

in Japan, and to reduce costs. But the

softwood lumber duties and the rising value

of the Canadian dollar have more than

offset our progress. And, our competition

has not stood still.

As leaders of three large Coastal forest

companies, we believe the industry needs

a vision that addresses the real issues not

only to survive, but

to thrive.

This document does not

presume to have all theanswers. Rather, it is

about formulating

a new beginning. It is

an attempt to paint a

picture of what the

industry could look like

in 10 years – if all

parties take collective

action now.

2 Embracing a new vision – Rebuilding BC’s coastal f orest industry

“Most importantly, stakeholders

in the forest industry must

recognize that its present

structure is not sustainable and

that fundamental changes, even

painful ones, must be made. They

must be ready and

willing to accept change, to share

the burden of change, and to

cooperate in bringing it about.”

DR. PETER PEARSE, 200 1



Active involvement from other Coastal

forest companies, our workers, the IWA,

contractors, First Nations and communities

is critical to strengthen and transform these

ideas into reality. The BC government – as

landlord and regulator – has a key role to

play in creating an environment that allows

this vision to be achieved.

Indeed, the BC public – as owner of 95%

of the resource – has the most to gain in

the revitalization of the

Coastal industry.

Above all, we believe it

is possible to rebuild theindustry. We also

believe the vision

presented in this

document is both

realistic and achievable.

We know from other

industries that dramatic

structural changes can

renew a sector. Our

workforce – highly

skilled and experienced

– is one of our

industry’s greatest

assets. With the support

and partnership of our

workers and their

unions – particularly the IWA – we believe

the Coastal forest industry can succeed

in making this kind of change.

By working together, we can create

■ Enhanced stability and more prosperity

in Coastal communities

■ New job opportunities for our children

and future generations

■ Greater and more stable financial returns

to the people of British Columbia

■ Renewed pride in a province built on an

industry that nurtures a sustainable and

renewable resource

The employees, families

and communities who

depend on the

industry’s viability

require all of us to

come together now to

take decisive action.

Alternatively, without

a concerted and

cooperative effort, the

industry and the way of

life it supports

will continue to decline.


WHAT THE COASTAL FOREST

INDUSTRY MEANS TO

BRITISH COLUMBIANS

■ It provides almost 100,000 direct

and indirect BC jobs

■ It supports more communities

than all other business sectors

combined

■ It provides enough taxes to

account for one of every five

dollars spent on health care in BC

or enough to pay for the

education of almost 300,000

children from Kindergarten

through Grade 12, every year



Beyond the MythsTHE REALITY FACING THECOASTAL FOREST INDUSTRY

It’s easy to blame softwood lumber duties for the problems facing the Coastal forest industry. But the truth is,the current crisis has been more than 15 years in the making. There are at least 23,000 fewer people working in the industry today than in the 1980s.Harvest levels, profitability and capital investment continue to decline.

It doesn’t have to be this way. We can turn

the industry around. The first step is to dispel

the myths that hold back needed change. By

facing the facts, we can recast the future of

the industry and create new opportunities.

FACT #1: BC HAS TWO SEPARATEAND UNIQUE FOREST SECTORS,COAST AND INTERIOR

From the species and size of trees, to the

types of mills, products and markets, theCoast and Interior forest sectors are vastly

different. Average products from the Coast

typically sell for almost twice the price of

lumber produced by Interior sawmills. But

costs on the Coast are more than double

those of the Interior. The bottom line is the

Coast and Interior are two unique

industries, with equally unique challenges

and needs.

FACT #2: THE WORLD IS AWASHIN WOOD

The dramatic increase in competition from

other regions and non-wood substitutes

means that our customers have more choice

than ever before. Just 15 years ago, only six

regions of the world supplied Japan with

wood products. Today more than 100

regions compete for its business. NewEuropean competitors captured $800 million

in annual sales to Japan from Coastal

producers in the last five years alone. The

Coast is also losing ground in other key

markets – lumber shipments to the United

States and Europe declined by 40% and

75% , respectively, in the last 15 years.




FACT #3: THE PROBLEM ISSTRUCTURAL, NOT CYCLICAL

Prices go up and down and marketsfluctuate. But the problems facing the

industry have more to do with high costs,

uncertainty about land use – both land

claims and access – and changing market

dynamics. These are structural problems

that must be addressed if the Coastal

industry is to have a viable future.

FACT #4: OUR HIGH-QUALITYWOOD NO LONGER PROVIDESA COMPETITIVE ADVANTAGE

BC’s Coastal forests produce some of the

strongest and most beautiful wood in theworld. For years our customers paid a

premium for appearance-grade Coastal

wood products. But they are no longer

willing to pay the traditional premiums

because our competitors are now using

technology to turn inferior wood into

high-quality products that compete directly

with Coastal products. Our products are also

facing more competition from non-wood

alternatives, including plastic, cement and

composite wood products. In fact, our most

abundant species, hemlock, has lost 50% of

its primary market in recent years.

FACT #5: A RISING DOLLAR HURTSTHE FOREST INDUSTRY

Canadian exporters have benefited for years

from the low value of the Canadian dollar

relative to the US dollar. The majority ofproducts shipped offshore or into the

United States is sold in US dollars. So the

rise of the Canadian dollar, from 63 cents at

the end of last year to more than 73 cents,

means that we actually receive less money

for our export products today than we did

last year. This has cost Coastal forest

companies millions of dollars in revenue and

cash flow that would otherwise be used to

support operations.


87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02

BC Coast Lumber Shipments On The Decline1987 – 2002 (Millions FBM)

5500

5000

4500

4000

3500

3000

2500

2000

1500



The Hemlock Challenge

Six out of 10 trees on the Coast are hemlock.So as the fortunes of hemlock go, so goes

the state of the Coastal forest industry.

Hemlock’s abundance, beauty, strength and

versatility helped fuel exports to Japan to

just over one billion board feet in 1995.

Unfortunately, that same year, the Kobe

earthquake destroyed thousands of homes

and Japan’s passion for unseasoned or

“

green”

hemlock products.

Prior to the earthquake, the trend towards

kiln-dried lumber was already evident.

Increased competit ion, particularly from

Scandinavia and Western Europe, provided

Japan with alternatives that took market

share away from Coastal producers.


HIGH COSTS ANDTHE SPIRAL OF DECLINE

The Coastal industry has the highest

costs of any region in the world because■ Labour costs are significantly higher

than in any other jurisdiction in

North America

■ Difficult terrain increases the

complexity and cost of logging

■ Past government policies have

traditionally hindered the natural

rationalization of operations and, in

the 1990s, new regulatory costs and

higher stumpage rates were imposed

■ The lack of capital reinvestment has

resulted in obsolete and inefficient

operations

The high cost structure has undermined

the region’s competit ive position as

prices continue to decline in the

global marketplace.

This has led to a downward spiral oflost market share, reduced operations

and low profitability. With inadequate

profitability, companies do not

generate the cash needed for

ongoing reinvestment, research and

development, and marketing. It also

makes it more difficult to access the

capital required for major projects such

as the construction of new mills.

The downward spiral also leads to

significant job losses, reduced work

hours, community instability and,

ultimately, less revenue to government.



The Coastal industry was slow to recognizeand adapt to these changes. As the industry

struggled to catch up by investing in kiln-drying

technology and new products, other

challenges mounted

■ The Japanese economy entered a major

recession in 1997, which reduced housing

starts by 40%

■ Supply from Europe, Russia and other

regions – supported by currency

advantages – siphoned away additional

market share from Coastal producers

The loss of market share in Japan

exacerbated the Coast ’s loss of market share

in the US and Europe that had occurred

because of trade restrictions and high costs

in the 1980s and early part of the 1990s.

As a result, the average value of hemlock

products shipped to world markets hasdeclined from $857 per thousand board

feet in 1995 to $630 per thousand board

feet in 2002 – a drop of 26%. This, in turn,

has put downward pressure on hemlock log

prices, which dropped from an average of

$114 per cubic meter in 1995 to $68 per

cubic meter in 2002.

Log prices have fallen even further in 2003

– to $56 per cubic meter – reflecting thecurrent weak state of the markets. With the

average cost of harvesting on public lands

on the Coast currently in the range of $100

per cubic meter, hemlock is being harvested

at a significant loss.


95

95 96 97 98 99 00 01 02

96 97 98 99 00 01 02

Average Annual Value of Hemlock Lumber($/mfbm)

Average Annual Value of Hemlock Logs($/m3)

$900

$850

$800

$750

$700

$650

$600

$120

$110

$100

$90

$80

$70

$60

$50

Average Hemlock Value $/mfbm

Source: Statistics Canada

Average Hemlock Log Value $/m3

Source: Vancouver Log M arket



What the IndustryCould Look Like –Our VisionWe can and will reverse the Coast’s decline. But it will not be easy and it wi ll come wi th some short-term pain.

Between $750 mil li on and $1 bil l ion in new capital investment will be required over the next 10 years. No one should underestimate the challenge involved in raising this amount of money. We must also invest in and aggressively market new wood products.

Our vision for the future of BC’s Coastal

forest industry is founded on a safe,

environmentally sustainable and profitableindustry. Achieving the vision means

generating new investment, creating

new wealth and building secure, stable

communities, now and for future generations.

It means building an international

reputation for environmental leadership

and world-class safety performance. It

means state-of-the-art mills that pay the

market price for every log. It means open

access for new industry players, big and

small, and new partnerships with First

Nations. It means being the supplier of

choice worldwide with more specialty,

value-added products and fewer commodity

products. It means cutting the full

sustainable harvest. It means more revenue

for government and more full-time jobs. It

means forest policies that benefit British

Columbians first and foremost.

And, importantly, it means that children

growing up in BC will know there is a

strong future for those who work in the

Coastal forest industry.

To make this vision a reality, we are

prepared to make commitments based

on our individual circumstances – such as

where and how we operate – to accelerate

the transition and to assist affected workers.

But we cannot do it alone. Other

participants in the industry must deliver

if we are to succeed.

Together, we have to address the real issues

■ Conflicts over access to the resource

■ High costs

■ Low product values and poor market

positioning■ Perceptions about the long-term future

of the industry

Now more than ever, collective and

cooperative action is needed. Everyone can

win, but tough choices need to be made.




#1 VISION: WORLD-CLASS MILLS

The industry of the future will break the

cycle of “no profit , no investment, no

modernization, no future.” It will be globally

cost-competitive and create more valuefrom every log. Efficient mills will mean

logs harvested in BC, stay in BC. Improved

financial returns will provide the funds

to keep pace with changing market

circumstances and for ongoing reinvestment

in new technology. The industry of the

future will have fewer primary mills, but

they will be world-class mills and will run

24 hours a day, 7 days a week. They will

extract the highest value from each log. In

10 years, there will be four to six new small

log mills on the Coast. As well, a revitalized

Coastal industry will help to secure the needs

of the pulp and paper sector and leverage

additional investment in those facilities.

OUR COMMITMENT: WE WILLUPGRADE EXISTING MILLS AND BUILDNEW ONES

■ We will retool existing mills that have the

potential to be competitive in the new

Coastal industry.

■ We will build or encourage investment in

new, technologically advanced sawmills to

process the growing supply of smaller

second-growth logs.

#2 VISION: A VIBRANT, GROWING,VALUE-ADDED INDUSTRY

Renewed profitability will enable

reinvestment in new technology and the

growth of a vibrant remanufacturing sector.BC Coastal woods such as hemlock,

fir, cedar, spruce, alder and maple are

exceptionally beautiful and versatile. They

are prized worldwide for their appearance

and durability. We envision a Coastal

industry in which they are processed in BC

by local craftsmen and by a globally

competitive, value-focused manufacturing

industry. New investments in dry kilns and

secondary manufacturing will help to

reposition Coastal forest products in the

marketplace. It will also increase the

employment and economic opportunities

for the next generation of Coastal workers

and communities.




OUR COMMITMENT: WE WILLENCOURAGE AND INVEST INSECONDARY MANUFACTURING

■ We will double the volume of lumber that

is remanufactured into specialty productswithin 10 years.

■ We will encourage further development

of the Coast’s value-added sector

through direct investments, joint ventures

or partnerships.

#3 VISION: BRAND-NAME PRODUCTSAND EXPANDED MARKETS

The industry of the future will be recognized

for brand-name products that feature the

unique attributes of Coastal wood. BC

hemlock, Douglas fir and western red cedar

will be names of choice. These products will

sell in every corner of the world. Along with

our traditional markets, emerging markets

such as China and India – with their growing

middle classes – will be the destination for

more Coastal wood products. Exports of

Coastal forest products will grow from $2.5billion today to $4 billion in 2013.

OUR COMMITMENT: WE WILL INVESTIN R&D, PRODUCT PROMOTION ANDMARKET DEVELOPMENT

■ We will double our investment in product

development and promotion, including

branding hemlock and other major

Coastal species as products of choice.

■ We will invest in recapturing market sharein North America, Europe and Japan.

■ We will invest in growing our market

share in the world’s emerging markets,

including China and India.

#4 VISION: RESPECTED WORLDWIDEFOR ENVIRONMENTAL LEADERSHIP

The industry of the future will continue

to meet the high environmental standards

demanded by our customers and BC citizens.

The Coastal industry will be a global leader

in environmental management through the

application of science-based principles,

collaborative approaches, sustainable forest

practices and independent, third-partycertification. Environmental integrity is a

hallmark that will ensure the environmental,

social and economic viability of our forests.




#6 VISION: WORLD-CLASS SAFETYPERFORMANCE

The industry of the future will be one where

no one gets hurt and no one gets killed.

All workers will go home safely, all the time.

We will have a culture that no longer

accepts that accidents are a part of the

business. Everyone will believe that all

accidents are preventable. Everyone will putworking safely first, all the time.

OUR COMMITMENT: WE WILL COMMITTO AND FUND PROGRAMS TOENHANCE SAFETY AWARENESS ANDPERFORMANCE

■ We will work towards the elimination of

fatalities and to achieving a Medical

Incident Rate (MIR) of less than one.

■ We will ensure that contractors andothers we work with have the same focus

and accountability on safety performance.

#7 VISION: MORE FULL-TIME,STABLE JOBS

The industry of the future will enhance

community stability by providing more

full-t ime, family-supporting jobs. There isthe potential to create more than 5,000

new full-time jobs in the solid wood

sector, including positions in silviculture,

logging, sawmilling, product development,

value-added remanufacturing, marketing

and transportation by 2013. The

relationship between the IWA and industry

will be redefined to recognize the mutual

importance of workers’ contributions and

companies’ need for profitability.

OUR COMMITMENT: WE WILL WORKWITH WORKERS AND THEIR UNIONTO MODERNIZE THE LABOURAGREEMENT, LOWER COSTS ANDREBUILD THE INDUSTRY

■ We will work to achieve a collective

agreement that is modern, flexible, free

from restrictive work practices and one

that ensures employees do well when

companies do well.

■ We will work with the IWA to reduce

labour costs to bring them in line with

costs in other North American regions.

There are significant savings to be made

through improved productivity, eliminating

“pay for time not worked” provisions, and

implementing more flexible work practices.

■ We will negotiate a separate collectiveagreement for value-added facilit ies that

improves the competitiveness of existing

operations and encourages investment in

new facilities.




#8 VISION: WORKERS LEAVING THEINDUSTRY ARE TREATED WITHDIGNITY AND RESPECT

In the short-term, transforming the industry

will mean fewer jobs. A successful transitionwill assist people leaving the industry as

they move into retirement or pursue other

opportunit ies. Significant funding will be

required to provide a sound social safety net

for affected workers.

OUR COMMITMENT: WE WILL HELPFUND TRANSITION AND MITIGATIONPROGRAMS FOR DISPLACED WORKERS

■ We will invest a portion of the

compensation we receive from the

government’s tenure take-back to ensure

people leaving the industry are treated

with dignity and respect as they move into

retirement or pursue other opportunities.

■ We will work with the provincial

government and the IWA to attract

additional funding to assist our workers in

the transition.■ We will create opportunities for younger

workers by assisting older workers to

bridge to retirement.

#9 VISION: MORE OPPORTUNITIES FORSMALL BUSINESSES

A healthy forest industry in the future will

reward entrepreneurial init iative in Coastal

communities. There will be moreopportunit ies for independent contractors

and small businesses. Partnerships between

large integrated forest companies and

smaller, community-based contractors will

be more important as we move to a more

market-based system.

Embracing a new vision – Rebuilding BC’s coastal f orest industry 13



OUR COMMITMENT: WE WILLENCOURAGE INNOVATIVEARRANGEMENTS WITH COMMUNITY-BASED FORESTRY AND LOGGINGCONTRACTORS

■ We will encourage the government and

the contractor community to further

pursue the modernization of contractor

legislation to ensure it is market-based.

■ We will encourage new and innovative

relationships with the most efficient

community-based contractors.

■ We will provide financial assistance to

support the rationalization of contractor

operations.

#10 VISION: FOREST POLICIES THATBENEFIT ALL BRITISH COLUMBIANS

The BC government has brought forward

the most substantive and innovative policy

reforms in half a century. The successful

implementation of the provincial

government’s forest policy reforms should

accelerate the recovery of the industry and,

in turn, the provincial economy. A healthy

industry will provide more revenue to

government and protect funding for health

care, education and other social programs.

The BC government will have completed

the 20% tenure take-back f rom licensees,

giving First Nations, communities and

small businesses a larger role in managing

the forests.

OUR COMMITMENT: WE WILL SUPPORTTHE IMPLEMENTATION OFGOVERNMENT POLICY REFORM

■ We will work with government to identify

and complete negotiations for one-quarter

of the tenure take-back under consideration

by the end of 2003, with the balance fully

complete by the end of 2004.

■ We will work with government to

implement a fair and equitablemarket-based stumpage system.

■ We will work with other forest licensees

to create more logical management units

and to lower harvesting costs.




USING BC’S STRENGTHS TOCOMPETE INTERNATIONALLY

The BC Coast has some of the world’s

most desirable softwood and hardwood

timber – a tremendous base for

competing internationally.

We need to bolster these natural

strengths through increased marketing

and product development. Better

marketing means anticipating the future

needs of our

customers. It means

working with each

customer to see

how Coastal wood

products can be

adapted to respond

better to the

changes taking

place in their

business.

For example, the

Coastal industry is aggressively

repositioning hemlock in the

marketplace, starting w ith making

significant investments in advanced

kiln-drying technology. On the

marketing side, the Zairai Lumber

Partnership, a consortium sponsored by

the federal and provincial governments

and five Coastal lumber producers, isusing research and promotion to ensure

Japanese builders are informed about

the superior performance and unique

attributes of Coastal species (see insert).

Recently, the Coastal industry launched

the E-120 Grade, which is lumber

manufactured to a new standarddesigned to meet the specific needs of

Japanese building codes.

Coastal companies are also marketing

Coastal species as alternatives to other

products for doors, windows, staircase

components, moulding, panelling,

siding, f looring,

ladders and similar

joinery andarchitectural

millwork items.

Embracing a new vision – Rebuilding BC’s coastal f orest industry 15



Final ThoughtsIn recent years the Coastal forest industr y has been str uggling to deal wi th changes in the global economy. And,while some progress has been made,people continue to hold onto the past – unwilling to face the reality that the industry cannot survive on its present

course.

There are numerous aspects of our external

environment beyond our control – such as

the Canadian dollar, new competitors and

the softwood lumber dispute. But there are

critical factors fully within the control of

industry, labour, government and

contractors that we can change.

The keys to revitalizing the Coastal industry

are repositioning our products, reducing

costs and achieving certainty over land use.

Achieving these goals requires the

modernization of our labour agreements,

the implementation of policy reform, capital

investment and the belief that the industry

can be revitalized.

The BC government ’s policy reforms can

provide the foundation for rebuilding our

competitiveness and attracting capital

investment.

However, what is clear is that no single

party can turn things around on its own.Now more than ever, collective and

cooperative action is needed to accelerate

positive change.

We are not prepared to sit idly by and

watch the continued decline of one of BC’s

key industries. For its part, industry has a

significant responsibility, which our three

companies are embracing.

This document has detailed the actions we

are committed to undertake in the months

and years ahead if others are willing to join

with us in charting a path towards creating

a new and vibrant Coastal forest industry

that benefits all British Columbians.


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