Canadian companies want collaboration without the sharing of risks and rewards. This will impact innovation, warns GE Canada President and CEO Elyse Allan.
The collapse in the U.S. housing market was devastating for Canada’s forest products industry, but Tembec Inc. chief executive officer Jim Lopez looks back at that economic event as a blessing in disguise for the industry’s long-term sustainability.
If lumber prices hadn’t plummeted, Lopez said the industry wouldn’t have been forced to work together to find new markets for its products.
“Without the catalyst, which was the U.S. housing crisis and the subsequent crash in lumber prices, we would never have gotten started,” said Lopez.
“The fact that we were all starving to death, and we needed some help, motivated us. We all knew the market was going to recover, but we said ‘We have to diversify our customer base.’”
Lumber prices have bounced back in recent years, thanks to a slow but steady recovery in the U.S. housing market, increased exports to China and a number of mill closures across North America. Combined, all of these factors are leading to a restructuring of the forest industry’s supply and demand model.
It was a long, hard road to this point and while companies are still struggling, Lopez said the industry is starting to move in the right direction.
“You can never replace what the U.S. home construction industry pulled out of our industry, but if it’s an extra three or four billion feet - as we found out with new markets in China - it can make a difference in terms of our ability to hold on to price.”
Over the years, the global forestry industry has “matured,” but Lopez thinks there’s still room for improvements in establishing new markets and preventing oversupply.
Lopez is a proponent of more consolidation in the industry, which he says creates stronger and more focused companies.
“Fragmentation is the enemy of our industry,” said Lopez. “Until we lick that we can do a lot of things by controlling costs and investing capital, but I think we are going to have a hard time breaking out of the model we’ve been in over the last number of years.”
In recent years, Tembec has been exiting businesses where it felt it wasn’t competitive enough. In late 2011, Tembec sold its hardwood flooring assets and in May 2013 closed the sale of its B.C.-based NBSK pulp mill.
Today, the company’s priorities are increasing competitiveness, reducing costs and improving its balance sheet, with a focus on four key markets; specialty cellulose, lumber, pulp and paper.
Tembec’s biggest market is specialty cellulose, which accounted for about 30 per cent of annual sales in 2012. The product is used across a number of industries, such as cosmetics, pharmaceuticals, personal care, food, coatings, electronics and energy.
For instance, it helps to make dairy products creamier, improves the durability of products such as paint and eyeglasses and is an essential binding ingredient in pharmaceuticals and cosmetics. It’s also part of liquid crystal displays on computer screens.
Tembec has a specialty cellulose research and development centre in France, where scientists and engineers work with customers on developing new applications and higher grades of the product.
In 2012, the company also made a $190-million capital investment to upgrade its specialty cellulose manufacturing facility in Temiscaming, Québec, to help increase production capacity and lower costs.
The main attraction for Tembec in the specialty cellulose market is that it’s already highly consolidated with huge barriers to entry for both technology and capital.
“It’s also not subject to the same cycles that we see in a lot of the other parts of the business,” said Lopez, who has been President and CEO of Tembec since 2006, and part of the Montreal-based company since 1989.
Pulp was Tembec’s second-largest market in 2012, at 28 per cent of sales, followed by 21 per cent each in lumber and paper.
Lopez said the company plans to continue working with others in the industry to find more uses for lumber, which remains a staple across many industries.
“Technology will never replace building products. We will never live in a megabyte,” said Lopez. “That means there are certain markets where the physical demand will always be there and will grow.”
The lumber market also provides an opportunity for the industry to be innovative, grow demand and help to sustain its future, which Lopez believes can only happen through collaboration.
“Sustainability is a lot more than just cutting trees and growing trees,” he said. “This is where the common good comes in.”
Lopez points in particular to an industry alliance formed between Canada and the U.S., which follows a decades-long dispute between the two sides over softwood lumber, one of the longest trade disputes in modern history. Today, the two sides have ongoing discussions about how to find new markets for their products in the industrial, institutional and high-rise building sectors.
That includes the creation of a so-called “check-off system” to fund a unified softwood lumber promotion program. Lopez describes it as a “self tax” charged to all lumber producers that ship lumber for sale in the U.S., funds from which are used to promote wood products and find new markets for the use of lumber.
An example is a 42-storey wood and concrete building being designed in Chicago, which is one of the “common good” projects that resulted from industry cooperation. It should have happened years earlier, Lopez said.
“If we would have started this 10 or 15 years ago, we would have had ongoing demand even during the U.S. housing crisis,” he said.