Annual Economic Review and Outlook for the Canadian Forest Sector:

Transcription

1 Annual Economic Review and Outlook for the Canadian Forest Sector: Canadian Forest Service Policy, Economics, and Industry Branch December 7, 27

2 2 Her Majesty the Queen in Right of Canada, 27 ISBN Cat. No. Fo51-2/27E-PDF

3 3 Forward The Canadian Forest Service is pleased to present the fourth Annual Economic Review and Outlook for the Canadian Forest Sector. This report provides an overview of recent developments in Canada s forest products industry and major markets for our forest products. In addition, we provide a qualitative assessment of the outlook for the industry for the remainder of 27 and into 28. This report was prepared using information available as of November 27. It was prepared by Debasish Datta, Paul Way, Romain Jacques and Paul Kearns of the Policy, Economics, and Industry Branch of the Canadian Forest Service under the supervision of Patrick O Neill, Director of the Economic Analysis Division. Note that this report only represents the opinions of the authors, and does not represent the opinions of the Government of Canada.

4 4 Contents 1. The Year & Beyond 1. Year in Review 2. Industry Outlook 2. Major Economic Developments 1. General Economic GDP and Housing 2. Exchange Rates 3. Forest Industry Overview 1. Forest Products Prices 2. Input Prices 3. Financial Performance Operating Profit and ROCE 4. Forest Industry Segments and Markets 1. Softwood Lumber 2. Structural Panels 3. Market Pulp 4. Newsprint 5. Printing and Writing Papers 5. Employment 1. Wood Industry 2. Pulp & Paper Industry

5 5 Year in Review Rise of Canadian dollar, rising input costs continue to hurt the forest industry The Canadian economy remained robust in 26 albeit weaker than in 25. Strength in the Canadian economy came from a surging energy and minerals sector, bringing about solid employment and income growth with it. However, high commodity prices in those sectors and a growing U.S. current account deficit led to the Canadian dollar sharply appreciating against the U.S. dollar. This served to undermine total forest product exports to the U.S. while crimping Canadian producer profits that were largely based on U.S. prices. Besides the high Canadian dollar, a softened U.S. housing industry, due to high inventory levels and elevated home prices, led to reduced demand for softwood lumber and structural panels products. Rising pulp demand was in part due to burgeoning demand in China, created from the nation s ramped up paper production and from the need to replace China s lost non-timber pulp supplies. In the newsprint industry, the wave of capacity closures experienced over the last few years was sufficient to continue to offset the structural decline in North American newsprint demand, ensuring prices increased on a year-over-year basis. Rising prices in energy commodities were fuelled largely by accelerating world crude oil prices, an offshoot of rising crude oil demand in numerous countries, but most notably in China. Combined with wood fibre costs, which have also risen significantly in 26, producer costs have climbed sharply. For example, the price of softwood pulp chips, the main source of fibre for pulp and paper producers, has been steadily increasing since 22, by 1.3% in Eastern Canada and 6.9% in BC. In fact, Eastern Canada and the US Northwest have the highest cost softwood chips in North America. Operating profits for the industry have now been in decline for the last three consecutive years. Conversely, the return on capital employed (ROCE) for the industry increased in 26. However, this was only due to the reimbursement of countervailing duties to Canadian softwood lumber producers following resolution of the Canada-U.S. Softwood Lumber dispute; filtering out the effect of the reimbursement payments, the industry ROCE in fact falls - for the third year running.

6 6 Industry Outlook How will producers survive the rampant Canadian dollar? The rapid appreciation of the Canadian dollar has been the central driving force behind rationalization and restructuring activity in the Canadian forest industry in recent months. With the Canadian dollar recently exceeding parity with the U.S. dollar, Canadian producers have found it increasingly difficult to export forest products to the U.S. Furthermore, the Canadian dollar has also appreciated against other major currencies of the world such as the Euro, the yen and the pound, hurting Canadian exports to Europe and Japan as well. The Canadian dollar is expected to stay strong through 27-8 as Chinese demand for energy and minerals commodities, the fuel behind the dollar s strength, is anticipated to remain robust. Additionally, if the U.S. current account deficit remains sizable or continues to mount, there will be pressure on the U.S. dollar to drop further while enhancing the strength of the Canadian dollar relative to it. The U.S. housing market remains a concern in 28 and its performance will have a strong influence on wood products producers in Canada. Further corrections due to credit tightening in the U.S. housing industry are anticipated, and the reduced key U.S. interest rates recently brought on by the U.S. Federal Reserve are unlikely to compensate for downward pressures faced in this market. A slow easing of abundant housing inventories is expected in the U.S. and as a result, the housing market is likely to remain weak through 28. In the fallout, North American wood products prices will remain low with Canadian producers facing diminished margins. On the home front, Canadian pulp and paper producers will continue to face stiff challenges. In particular, wood fibre costs are anticipated to remain formidable as reduced wood availability in Ontario and Quebec will continue to keep pulp chip prices high, while in British Columbia the rapid infestation of the mountain pine beetle will result in reduced wood supply in the medium term. However, besides lumber and panel products, British Columbia has also witnessed rising pulp chip prices, a trend that is anticipated to continue, likely hurting the province s pulp producers.

7 7 Economic Conditions North American economy slows down in 26 Context: Gross Domestic Product (GDP) is the measure of the productivity of an economy. It provides the final value of all goods and services produced in an economy in a given year and is typically used to gauge how well an economy is doing. Key interest rates determine the cost of borrowing money and have an impact on inflation, the exchange rate and the growth rate of the economy. Key Developments: Canadian real GDP grew at an annual average rate of 2.8% in 26, down just.3% from 25. In the U.S., real GDP growth in 26 fell.7%, to 3.2%. In 26, Canadian and U.S. interest rates steadily rose until about mid-year, remaining stable thereafter. Year-over-year, Canadian and U.S. interest rates are up 1.4% and 1.8% respectively. Important Factors: Record setting commodity prices, particularly for crude oil and metals, and strong employment growth helped boost the Canadian economy in 26. In face of a strong Canadian dollar, averaging 88 U.S., real GDP growth remained robust. In the U.S., the target interest rate rose to contain inflationary pressures within the economy for the first half of the year. This served to slow economic growth relative to 25. Outlook: In the Fall of 27, the U.S. target interest rate was lowered to offset the drag on economic growth created by tightening credit standards in the U.S. housing industry. Any prolonged U.S. economic growth concerns will prompt the U.S. Federal Reserve to lower interest rates further. In Canada, moderate economic growth is expected through 28 and 29 with inflationary pressures remaining within target levels in the medium term. 4.5% 4.% 3.5% 3.% 2.5% 2.% 1.5% 1.%.5%.% (%) % Jan-2.8% Jul-2 Key Interest Rates Canada - Overnight Rate Target US - Fed Funds Target Rate Jan-3 Real GDP Growth Canada 1.9% 1.6% Jul-3 Jan-4 United States 3.1% Jul-4 2.5% Jan-5 3.1% Jul-5 3.9% Jan-6 Source: Federal Reserve, Bank of Canada 3.2% 2.8% Source: Bureau of Economic Analysis, Statistics Canada Jul-6

8 8 Housing Markets U.S. housing market expected to weaken in 28 Context: Residential investment is a key indicator of demand for the forest industry as the majority of wood products are used in the construction of new homes and repair/remodelling of existing homes. Key Developments: Canadian housing starts remained stable through 26 while U.S. starts declined 12.5% from a 5 year high in 25. In Canada, residential expenditures on renovations increased by 1.4% year-over-year while to a lesser degree in the U.S., by 3.%, over the same period. Important Factors: Low mortgage rates, solid growth in employment income as well as high consumer confidence kept Canadian housing starts robust through 26. In the U.S., abundant housing inventory, rising home prices, and higher interest rates, raised by the Federal Reserve to curb burgeoning inflationary pressures in the economy, led to a slowdown in the U.S. housing market. Outlook: Rapid growth in house prices combined with increases in mortgage rates will likely cause a dampening of demand in the Canadian housing market through the remainder of 27 and into 28. With lower house prices and inventories of unsold homes, the U.S. housing market is likely to weaken in 28 although recent cuts in U.S. interest rates are expected to offset the decline somewhat. 22 Canadian Canada Dollars North American Housing Starts (1,s Units) Canada United States Source: Canadian Mortgage Housing Corporation, U.S. Census Bureau Residential Expenditure on Renovations $35 $3 $25 $2 $15 $1 $5 $ ($ Billions) Canada United States 2,5 2, 1,5 1, 5 -$ Source: Canadian Mortgage Housing Corporation, Bank of Canada, U.S. Census Bureau, U.S. Bureau of Labor Statistics $225 $175 $125 $75 $25 United States Dollars 22 U.S.

9 9 Exchange Rates Energy, metal prices drive the dollar in 26 Context: The majority of Canada s forest products are destined for export and the U.S. is our biggest customer. Fluctuations in the exchange rate affect the competitiveness of Canada s forest industry because they affect the relative costs of the industry compared to its international competitors. Key Developments: In 26, the Canadian dollar continued to appreciate against both the U.S. dollar and the Euro, by 6.8% and 5.7%, respectively. This marks the 4 th consecutive year the Canadian dollar has appreciated against the U.S. currency while the 2 nd against the Euro. This is also the 5 th straight year that the Euro has risen against the U.S. dollar although in 26 the appreciation was subdued, up only.9%. Important Factors: The strength of the Canadian dollar against the U.S. currency has mainly been driven by soaring commodity prices, particularly in energy, and metals and mining, which have attracted significant amounts of capital investment in those sectors. Compounding the weakness in the U.S. dollar has been the rising US current account deficit, which as a share of the U.S. GDP has risen for the 5 th consecutive year and is at an all-time high. Rising European Central Bank interest rates and flat U.S. interest rates through the second half of 26 also led to support for the Euro against the U.S. dollar. Outlook: Continually rising commodity prices, reflected in climbing crude oil prices, which hit new all-time highs in the Fall of 27, spurred the Canadian dollar above $1. US for the first time since the mid-197s. Although commodity prices are expected to moderate, the Canadian dollar is anticipated to remain strong as U.S. interest rates stay flat or fall while the U.S. current account deficit continues to rise. US Dollar terms Share of GDP U.S. Current Account Deficit as a Share of Real GDP 8.% 6.% 4.% 2.%.% Value of the Canadian Dollar and All Commodity Price Index Jan-2 All Commodity Price Index Jul-2 Current Account Deficit as a Share of Real GDP 7.2% 6.9% 5.1% 6.% 4.6% Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Source: Bank of Canada, Statistics Canada $US/$CDN Source: Bureau of Economic Analysis; Federal Reserve $US/$CDN

10 1 Forest Product Price Index Forest product price index unlikely to rebound Context: Variability in forest product prices is one of the principle sources of volatility in the revenue of the forest industry. Markets price forest products in U.S. dollars so the Canadian industry is strongly affected by the exchange rate. Specifically, this affects revenue received when translating prices back into Canadian dollars. The forest product price indices presented here reflect returns received by Canadian producers based on the prices of Canada s major forest products, weighted by the value of their shipments. Key Developments: The Canadian forest industry price index decreased in 26, reflecting significant price declines in the wood manufacturing sector that more than offset price increases in the pulp and paper sector. Currently, the index is performing 2.3% below its average for the period. In contrast, the U.S. forest industry index is 12.7% higher than its average for the same period. Important Factors: While the weak U.S. housing market has kept wood product prices low, a rising pulp and paper price index was due to relatively high pulp and newsprint prices which increased on a year-over-year basis. Additionally, the strong Canadian dollar has generated weak returns for Canadian producers while their U.S. counterparts have fared well in comparison. Outlook: A weak U.S. housing market will likely ensure that prices in the wood manufacturing sector stay relatively low through 28. Furthermore, pulp and paper prices will likely fall from current levels as demand declines in newsprint begin to outstrip the pace of supply cuts in the industry Index Value Jan-2 Forest Industry Price Indices: Canada & U.S. (Average for = Base) Canadian Forest Industry Price Indices (Average for = Base) May-2 Jan-2 All Forest Products Wood Pulp & Paper Sep-2 May-2 Sep-2 Jan-3 Jan-3 May-3 Sep-3 $US/$Cdn Canada U.S May-3 Sep-3 Jan-4 Jan-4 May-4 May-4 Sep-4 Sep-4 Jan-5 Jan-5 Source: Statistics Canada May-5 May-5 Sep-5 Sep-5 Jan-6 May-6 Jan-6 Sep-6 May-6 Source: Statistics Canada; U.S. Department of Labor Sep-6 Exchange Rate

11 11 Input Prices Oil prices remain high; fibre costs begin to increase in BC Context: A large share of forest industry production costs is comprised by wood fibre and energy. While fibre costs are important for wood products producers, pulp and paper producers are strongly impacted by both fibre and energy costs. Energy costs also have indirect effects such as affecting the transport costs of fibre to mills and finished products to markets. This is especially important for Canadian producers, many of whom operate in remote areas, far from export markets. Key Developments: A key indicator of North American energy costs is the West Texas Intermediate (WTI) crude oil spot price. Since reaching a 21 year low of $11.35/barrel in late 1998, amid periodic fluctuations, WTI has been steadily rising. WTI started to fall in August 26, before recovering in the autumn. WTI increased by 16.9% in 26 and at an annual average rate of 26.1% since 22. The price of softwood chips, the main source of fibre for pulp and paper, also steadily increased since 22, by 1.3% in Eastern Canada and 6.9% in BC. Eastern Canada along with the US Northwest has the highest cost softwood chips in North America. Important Factors: Rising demand for energy, particularly in China, has provided the impetus behind the rising WTI price. In Eastern Canada, high electricity prices in Ontario have been due to a shortfall in generation capacity while in Quebec a reduction in timber supply due to recommendations of the Coulombe Commission have put upward pressure on wood chip prices in that province. Outlook: With WTI anticipated to remain high in the near future and wood fibre supplies expected to remain scarce, producer input prices will likely remain elevated. Further sawmill closures, contributing to dwindling pulp chip supply, will more than likely offset reduced pulp chip demand from planned pulp and paper mill closures, creating upward pressure on future softwood chip prices Jan Q1 May-2 Sep-2 22 Q3 WTI Crude Oil Spot Price (US$/Barrel) Jan-3 23 Q1 May-3 Sep-3 Softwood Chip Prices (US$/oven dry metric tonne) 23 Q3 BC Jan-4 24 Q1 May-4 Sep-4 24 Q3 Jan-5 Canada East 25 Q1 May-5 Sep-5 Energy Information Administration 25 Q3 Random Lengths Monthly Jan-6 26 Q1 May-6 Sep-6 26 Q3

12 12 Financial Performance Rise of dollar, poor wood and newsprint prices weaken industry performance Context: High operating profit (OP) is a sign that the core business activity of the industry is in good health while return on capital employed (ROCE) is a measure of how efficiently the industry is using capital. Key Developments: In 26, forest industry operating income plummeted 41% compared to 25, whereas the ROCE increased to 5.8%, compared to 3.4% in 25. This apparent contradiction between operating income and ROCE is due to the reimbursement of countervailing duties on softwood lumber, which is accounted for in the calculation of the ROCE, but not in earnings. If the ROCE is adjusted by removing reimbursement of the countervailing duties, the result is a drop in return compared to 25. Important Factors: The reduction in operating income and the ROCE is due to the drop in price for wood products and newsprint as well as the rise in the Canadian dollar, which reduces producer revenues. Reimbursement of the countervailing duties alone has been able to artificially maintain a rising ROCE. Outlook: The factors that impacted the profitability of the wood and paper industries will continue in 27. Housing construction in the U.S. continues to drop while the demand for newsprint is in freefall and seems to be extending to other paper categories. (Billions $) % 7% 6% 5% 4% 3% 2% Operating Profits in the Wood & Paper Manufacturing Industry Source: Statistics Canada: Quarterly Financial Statistics for Enterprises Return On Capital Employed Excluding Duties Including Duties Source: Statistics Canada: Quarterly Statistics for Financial En te rpri s e s

13 13 Softwood Lumber Decline in housing market precipitates a slide in lumber prices Context: Canada is the world s largest exporter and second largest producer of softwood lumber. Softwood lumber accounts for ¼ of Canada s forest product exports with most going to the U.S., but a portion to Japan as well. Softwood lumber prices have been declining since mid-24 and now are hovering near five-year lows. Key Developments: In 26, significant declines in softwood lumber prices (-15.6% year-over-year) and a strong appreciation in the value of the Canadian dollar relative to the U.S. currency (+6.8%) substantially reduced Canadian denominated prices received by producers shipping to the U.S. In fact, the volume of Canadian exports to the U.S. fell by 4.6% during the year. However, Canadian exports to Japan increased by 5.7%, in spite of the loonie appreciating 12.7% against the Japanese yen. For the rest of the world, the volume of Canadian exports spiked by 2.2%, with the value climbing by 9.9%. Important Factors: In 26, the decreased demand for Canadian softwood lumber was primarily due to a weakening U.S. housing market, hurt by rising U.S. interest rates in the first half of the year, a slowing economy and rapidly rising U.S. home prices. Partially offsetting this decline was boosted lumber demand due to a solid Canadian housing market, performing almost as well as last year, and a strengthening housing market in Japan, which marked its 4 th consecutive year of rising housing starts. Outlook: After the recent.5% decline, U.S. interest rates will likely remain flat through 27 as concerns about the downside pressures of the subprime mortgage market and related credit tightening standards on the U.S. economy weigh in against the slightly improved performance of the U.S. economy, growing at a slow but positive rate. Lumber demand will likely remain weak through 27 as the housing market sorts through these contrasting pressures Random Lengths Framing Lumber Composite Price (US$/MBF) Jan-2 Apr-2 Jul-2 Oct-2 Jan-3 Apr-3 Jul-3 Oct-3 Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct-6 22 Source: Random Lengths Canadian Softwood Lumber Exports (Billions of C$) US Japan Rest of World Source: Statistics Canada 26

14 14 Structural Panels Slowdown in housing, rising loonie hurt panel exports Context: About ¾ of Canada s structural wood panel production is exported abroad, with most heading for the U.S. About 8% of this export consists of oriented strandboard (OSB), with the remainder plywood. New residential construction is the main driver of this market, consuming 54% of North American output, followed by repair and remodelling (21%) and industrial demand (2%). In 26, structural panel prices embarked on a lengthy slide, closing in on five-year lows by the end of the year. Key Developments: In 26, a rising Canadian dollar relative to the U.S. dollar and significantly declining product prices (-22.8%) were primarily responsible for the decrease in the value of exports shipped to the U.S. (-26.%). While the volume of Canadian exports to the U.S. also dropped (-3.8%), offshore imports to the U.S. declined more substantially, by 24.4% for plywood and 65.9% for OSB. Important Factors: Although the decline in demand for structural panel products was largely driven by a weak U.S. housing market, Canadian exports to the U.S. were somewhat helped by healthy demand in the non-residential, industrial and repair and remodelling markets. The decline in offshore imports to the U.S. were largely due to reduced shipments from Brazil, the result of a strengthened Brazilian real, which appreciated by 12.% year-over-year, and an 8% tariff imposed on Brazilian plywood imports to the U.S. in July 25, which made its full impact felt through the course of 26. Outlook: With a U.S. housing market anticipated to remain weak through 27, residential structural panel demand is expected to stay sluggish. Mill closures (Weyerhaeuser, Tolko) implemented towards the end of 26 will help keep some supply off the market, but overall prices will likely remain about on par with those witnessed in Random Lengths Structural Panel Composite Price (US$/MSF) Jan-2 Apr-2 Jul-2 Oct-2 Jan-3 Apr-3 Jul-3 Oct-3 Jan-4 Apr-4 Jul-4 Oct-4 Jan-5 Apr-5 Jul-5 Oct-5 Jan-6 Apr-6 Jul-6 Oct Source: Random Lengths Canadian Panel Exports to the US, (Billions of C$) Source: Statistics Canada 26

15 15 Market Pulp Chinese pulp demand aids Canadian exports Context: Canada is the world s largest exporter and second largest producer of wood pulp, with Northern Bleached Softwood Kraft (NBSK) being Canada s most important market pulp grade in terms of production. Over the past few years, Canada s share of global market pulp has been declining as demand growth shifts away from North American markets. Key Developments: In 26, market pulp prices increased steadily to close 2% higher than the previous year. In fact, of all major forest products, market pulp is the only product whose price rose faster than the Canadian dollar, leaving Canadian producers with greater revenues. Important Factors: In 26, Canadian exports to the U.S. and Europe declined while exports to China, Japan and the rest of the world increased. In fact, market pulp accounted for nearly 15% of all Canadian exports to China - Canada s main export product to China. The increase in exports to China was due to increased pulp demand for paper production and to replace lost non-timber pulp supplies from closed domestic mills - due to pollution problems with their associated pulp production. In Canada, industry continued to streamline in 26, represented by closures of the Cascades plant in Jonquière, QC (8, tonnes/year) and the Tembec plant in Smooth Rock Falls, ON (2, tonnes/year). Outlook: Canada and Europe each supply about 4% of worldwide NBSK demand, giving each region significant market leverage. As a result, lost revenues from the appreciation of their respective currencies against the U.S. dollar can be supplanted by an equivalent price increase in the U.S. market. However, capacity expansion in South America and Asia will in part offset this, mitigating price increases induced by rising exchange rates Billions of C$ Jan May-2 Northern Bleached Softwood Kraft (NBSK), Delivered to US (US$/Tonne) Sep-2 Jan-3 May-3 Sep-3 Jan-4 May-4 Sep-4 Jan-5 May-5 Canadian Pulp Exports US EU-15 China Japan Rest of World Source: World Trade Atlas Sep-5 Source: Pulp & Paper Week Jan-6 May-6 Sep-6

16 16 Newsprint Newsprint exports continue to fall, prices begin to slide Context: Canada is the world s largest producer and exporter of newsprint. However, the size of Canada s newsprint market has been shrinking for some years now due to a structural decline in North American newsprint demand. This has been driven by the maturation of the North American market and due to the growth of online media sources. Key Developments: Over the past four years, producers have been actively reducing their production capacity, more than offsetting a decrease in demand, thereby contributing to a sustained rise in U.S. newsprint prices. This price increase, however, ended in May 26, when it peaked at US $675 (per tonne) before commencing a decline as of October 26. Important Factors: The rapid rate of capacity reductions evident in 25 about 9% of North American newsprint capacity was removed - was not sustained in 26. Of the few major closures in 26, one of the most notable was the closing of Bowater s Thunder Bay plant (396, tonnes/year). However, the pace of closures was still sufficient to support prices until midyear before the pressure of falling newsprint demand caught up with supply cuts, forcing prices to fall back in line. Outlook: Analysts expect North American newsprint demand to decline by about 6% in 27. Although too few closures have been planned to offset this decline, ramifications of the Abitibi-Bowater merger will be critical. Experts believe removal of 75, tonnes of newsprint capacity will be necessary to keep the market in balance. Given Abitibi and Bowater are North America s top two newsprint producers, holding 27% and 2% of North America s newsprint capacity, their activities will likely influence the market balance Jan May-2 Newsprint Prices, Delivered to the US (US$/Tonne) Sep-2 22 Jan-3 May-3 Canadian Newsprint Exports (Billions of C$) US 23 Sep-3 Jan-4 May-4 Rest of World 24 Sep-4 Jan-5 May-5 Source: Pulp and Paper Week 25 Source: Statistics Canada Sep-5 Jan-6 26 May-6 Sep-6

17 17 Printing & Writing Papers Capacity reductions help prop up free-sheet paper prices Context: Printing and writing papers comprise about 42% of total Canadian paper production. It includes uncoated and coated varieties of groundwood (UGW, CGW) and freesheet paper (UFS, CFS). About 53% of total Canadian printing and writing paper production is made up of UGW, a paper similar to newsprint. As with newsprint, many printing and writing paper products face a slowdown in demand growth due to competition from online media sources Printing & Writing Paper Prices (US$/Short Ton) UGW UFS CGW CFS Key Developments: Prices for all groundwood paper grades decreased in 26 compared to 25, by 3.% for uncoated and 2.% for coated paper. Conversely, uncoated and coated free-sheet paper prices increased by 1.% and 2.4% respectively. During this period, coated groundwood exports increased by 19.%. This was in contrast to coated and uncoated free-sheet exports which declined by 46.1% and 3.6%. Uncoated groundwood paper exports also decreased, by 8.4% Jan-2 May-2 Sep-2 Jan-3 May-3 Sep-3 Jan-4 May-4 Sep-4 Jan-5 May-5 Source: Pulp and Paper Week Sep-5 Jan-6 May-6 Sep-6 Important Factors: Faced with higher energy and wood fibre costs and an appreciating Canadian dollar, producers continued to press for higher end-product prices. While price increases were realized in free-sheet paper markets, this was in part due to the numerous capacity reductions implemented during the year including the removal of 26.7% of total Canadian UFS capacity (394, tonnes) and 18.6% of Canada s coated papers capacity (297, tonnes). However, the addition of 76, tonnes of UGW capacity induced a price decline in that market. Outlook: Experts anticipate that UFS demand will decline at an average annual rate of 3.% for 27, more than offsetting any anticipated UFS capacity reductions. A slowing North American economy in 27 and 28 will see weak demand growth for some other printing and writing paper grades as well, placing further downward pressure on those markets. Billions of C$ Canadian Printing & Writing Paper Exports CFS CGW UFS UGW Source: World Trade Atlas

18 18 Wood Industry Employment Employment continues to fall in the wood industry... Context: Over the last few years, employment levels in the Canadian wood industry have been varying with the fortunes of the U.S. housing industry. From 22 until 24, a strong U.S. housing market brought about increased demand for Canadian wood products and with it an increase in employment. Conversely, relatively weaker markets since then have been accompanied by lower levels of employment in the Canadian wood industry. Key Developments: Employment in the Canadian wood industry decreased by 4,8 jobs in 26, down 3.6% compared to 25. This was mainly due to decreases experienced in Quebec and Ontario, by 4.7% and 4.1% respectively. Important Factors: Numerous mill closures throughout Canada, induced by poor economic conditions, sparked faltering employment. Generally, the high value of the Canadian dollar has contributed to reduced returns for Canadian producers while a weak U.S. housing industry has resulted in lower demand for softwood lumber and wood panel products, forcing producers to make cutbacks. In Quebec and Ontario, scarce wood supplies, created by a reduction in annual allowable cuts of timber, have made many mills uneconomic, weakening profit margins while provoking further layoffs. Outlook: Recently, the Canadian dollar reached parity with the U.S. currency and this strength in the Canadian dollar is anticipated to continue. Combined with weak wood products demand from the U.S. housing market, greater layoffs are anticipated from Canadian wood producers as they scramble to compensate for falling profit margins. 5, 4, 3, 2, 1, Employment in the Wood Industry NB Québec Ontario Alberta BC Other Source: Statistics Canada - Survey of Employment, Payroll and Hours (SEPH) 3, 2, 1, -1, -2, Annual Employment Gains/Losses in the Wood Industry NB Québec Ontario Alberta BC Other Source: Statistics Canada - Survey of Employment, Payroll and Hours (SEPH)

19 19 Pulp & Paper Industry Employment Plant closures and layoffs concentrated in Eastern Canada... Context: Since 1991 employment in the pulp and paper industry has declined by about 3%. In the 199s productivity gains and oversupply in the marketplace contributed to these losses. However, in recent years, the freefall in North American newsprint consumption has brought about several plant closures and associated layoffs. Job losses have been greatest in Eastern Canada where the pulp and paper industry is concentrated. Key Developments: Employment in the pulp and paper industry fell by 4.4% in 26. The greatest declines were in Quebec (-1,7) and Ontario (1,), down 5.9% and 3.3% respectively. Significant decreases were witnessed in New Brunswick (-1.5%) although employment in the Alberta pulp and paper industry increased by 7.9%. Important Factors: Several plant closures and a reduction in mill activities -, an industry-wide attempt to offset decreasing profit margins, contributed to the general decline in jobs in the industry. A strong Canadian dollar, higher energy and wood fibre costs, creating reduced profit margins, were the main forces driving rationalization activity in the industry. Outlook: The decline in demand in newsprint and pulp products, amid pressure faced from the strong Canadian dollar, will continue to encourage Canadian producers to rationalize production capacity while improving their profit margins. Bowater and Abitibi-Consolidated, which just recently merged, together supply almost half of the newsprint market. Currently, they are evaluating several mill operations, which may impact the industry employment picture. 4, 3, 2, 1, Employment in the Pulp and Paper Industry NB Québec Ontario Alberta BC Other Source: Statistics Canada - Survey of Employment, Payroll and Hours (SEPH) 3, 2, 1, -1, -2, -3, Annual Employment Gains/Losses in the Pulp and Paper Industry NB Québec Ontario Alberta BC Other Source: Statistics Canada - Survey of Employment, Payroll and Hours (SEPH)

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