Montreal PQ

QUEBEC VIEW: RESOURCES Forestry crisis rooted in politics

KONRAD YAKABUSKI MONTREAL Joseph Kruger II, the reclusive Quebec forestry billionaire behind Canada's best-selling brand of toilet paper, has a new product to sell. Last month, Kruger Inc., whose Cashmere tissue is the top choice of discriminating Canuck bums, bought the company that bottles most of the French wine sold in Quebec grocery stores. A few days later, Kruger shut down four lumber mills in the province.

So, does that mean there's a bigger future in selling woody plonk than wood planks? You'd be forgiven if the closing in the past month of more than a dozen Quebec sawmills -- including the four that Abitibi-Consolidated Inc. indefinitely shuttered on Tuesday, and the three that Domtar Inc. closed yesterday in the province -- leads you to respond in the affirmative. But you'd have to be half smashed to think it doesn't matter.

Bay Street hardly gives a hoot, of course. Abitibi got booted from the S&P/TSX 60 index a couple of weeks ago, when Tim Hortons got promoted to the composite index. In or out of the index, Abitibi's now a featherweight. The market capitalization of Canada's biggest forest company is $1.3-billion -- on a good day. The doughnut shop? Six billion. That's dollars, not calories.

Providing double-doubles to captive Canadians (combined with the prospect of getting Yanks hooked, too) sure looks a lot more lucrative these days than making two-by-fours or toilet paper. But don't let the stock market's fascination with Tim or RIM (market cap $24-billion) fool you into thinking Canada's economy, especially the eastern half, doesn't depend much on the forestry industry any more.

Forest products is still an $84-billion industry in Canada. With exports of $42-billion in 2005, it is the second-largest contributor to Canada's trade balance and accounts for 60 per cent of our current surplus. The forest industry is the largest customer of the country's railways and ports. It's the No. 2 source of business for the trucking industry. So, when Abitibi closes its Outardes sawmill in Baie-Comeau, the impact echoes far beyond the North Shore of the St. Lawrence.

Every roadside diner from Quebec City to Cincinnati feels the pinch.

In Quebec alone, there are more than 100,000 direct jobs in forestry -- about 19,000 at the sawmill level, down from more than 24,000 in 2002. The province accounts for slightly less than a quarter of Canada's softwood lumber shipments. Officially, Abitibi blames its recent mill closings on the combination of a higher Canadian dollar and slumping U.S. housing starts and lumber prices. The settlement of the Canada-U.S. softwood lumber dispute has made matters temporarily worse as Canadian producers flooded the U.S. market in advance of the implementation of a permanent export tax starting today. But these factors are only half the problem -- and the easy half at that.

The biggest reason Eastern Canada's forest industry has lost almost every comparative advantage it ever enjoyed -- and there used to be many -- is politics. Governments have managed our forests to maximize jobs and minimize efficiency. The inherent risk of such a strategy is that eventually there are almost no jobs left to maximize.

In Quebec, forest harvest licences are awarded on a mill-by-mill basis. In order for Abitibi or Domtar or Tembec to chop trees in a designated area, no matter how small, they must agree to process all of their wood volume at a mill that specifically corresponds to one licence alone. That has kept the number of mills and communities dependent on them high -- at about 250 -- but the volume of wood processed by each mill low. Overharvesting in the past means there's even less wood supply in each licence area, so that dozens of Quebec mills now run at below 50-per-cent capacity -- even though the average mill capacity is only about 60 million board feet.

Compare that to British Columbia, where the average mill capacity is 150 million board feet. It used to be much lower than that, as political considerations ruled. But a few years ago Premier Gordon Campbell's government got real and allowed the lumber industry to rationalize. It meant closing smaller mills and allowing licences to be consolidated at bigger ones. It was not a painless transition.

But the result is that the thousands of remaining jobs in the B.C.

lumber business are a lot more secure today.

Quebec Premier Jean Charest's government has tiptoed around the minefield that is the province's forest crisis for long months in the hopes that nothing would explode before it next went to the polls. With the flurry of closings in recent days, explosion there has been. The probability of a fall provincial election -- which was still above 50 per cent a week ago -- has just fallen to nearly zero.

Yesterday, Natural Resources Minister Pierre Corbeil and Economic Development Minister Raymond Bachand rushed to the microphones to promise an aid package soon. This is the same pair that trumpeted a $1-billion package in last March's provincial budget, knowing that the loan guarantees that made up almost all of the total were useless since no forest company in the province is flush or masochistic enough to invest new money these days. The proof: Not a single forestry CEO has taken the government up on its offer. Instead, like the thousands who've lost their jobs, they're just drowning their sorrows.

Maybe Mr. Kruger is on to something. The plonk eases the pain.