B.C. forest and paper industry earnings continue to decline through 2006

    VANCOUVER, May 10 /CNW/ - The B.C. forest and paper industry is now two
years into a steady decline in profitability. The 2006 Return on Capital
Employed (ROCE) - a key industry metric of financial health - dropped to
negative 1.8% from 4.1% in 2005, and was well below the 10 year average of 4%.
The ups and downs in lumber and pulp prices translate into volatile B.C.
industry earnings. According to findings released today by
PricewaterhouseCoopers (PwC) at its 20th annual Global Forest and Paper
Industry Conference in Vancouver, in 2006 the B.C. industry lost more than
US$ 500 million, excluding countervailing duty refunds.
    Across Canada, ROCE fell to an estimated 0.5% in 2006 from 5.5% in 2005.
This was below the global ROCE average of 4.6%. These numbers once again fall
far short of the 10 to 12% ROCE target needed to be competitive in the capital
markets. By comparison, emerging markets posted a ROCE of 12.6% in 2006 and
elsewhere around the world ROCE ranged from 3.8% in Europe, 4.7% in Japan and
4.2% in the US.
    "B.C. has had a couple of years of reasonable earnings over the last
decade and was the top performing region in 2004 because of record high lumber
prices," says Craig Campbell, leader of PwC's performance improvement practice
for the global forest and paper industry. "Forty-five percent of the B.C.
forest and paper industry is lumber and therefore the change in lumber prices
and exchange rates have been big influencers on the performance of the B.C.
forest industry."
    Campbell adds that B.C. lumber producers have been able to weather the
storm somewhat with the return of approximately US$ 2.5 billion of
countervailing duties withheld by the US during the softwood lumber dispute.
In real terms, lumber prices are at their lowest levels in the last 25 years.
Yet, the good news is that prices are expected to improve modestly for the
balance of the year.
    On the other hand, pulp prices are currently at their highest level in US
dollars since a peak in 1995. Even though exchange rates and higher fibre and
energy costs have eroded a good portion of the increase this is good news for
B.C. given that pulp is the second largest sector - but still only
approximately 15% of the B.C. forest industry. The outlook is good over the
short term, but there is a wave of South American capacity that is due to
crest next year.
    Consolidation is accelerating in the global industry with over 280
mergers and acquisitions (M&A) with a value of nearly US$ 26 billion completed
in the global forest, paper and fibre-based packaging sector in 2006. North
America remained at the forefront of forest, paper and packaging M&A activity,
with a 67% share of deal values in 2006. The second largest forest products
company deal in 2006 occurred in Canada-Domtar Inc's acquisition of
Weyerhaeuser Co's fine paper business and related assets for US$ 3.3 billion.
Cascades Inc.'s acquisition of 50% of Norampac Inc. for US$ 476 million and
West Fraser Timber Co. Ltd's purchase of 13 lumber mills from International
Paper Co. for US$ 325 million ranked among the ten largest deals in North
America. Western Forest Products acquired Cascadia Forest Products in 2006 in
a deal valued at approximately US$ 195 million. Third Avenue Management LLP, a
New York hedge fund, has over US$ 800 million invested in B.C.-based Canfor
Corp., Canfor Pulp Income Trust and Catalyst Paper and is now the largest
shareholder in the province's two pulp and paper companies and is the second
largest shareholder in Canfor. The second and third largest owners in the B.C.
forest and paper industry are also financial players: Montreal's Jarislowsky
Fraser, and Vancouver's Jim Pattison, respectively.
    "These financial players are interested in the B.C. industry despite the
recent poor performance because they see potential," says Campbell. "We have
the best fibre for softwood pulp and SPF lumber, world-class Interior
sawmills, a highly trained and competent labour force, sophisticated
infrastructure, and a stable government and political climate. But we also
have some significant challenges here in B.C. which we must overcome."
    One of the biggest challenges continuing to face the B.C. market today is
in the mountain pine beetle. In B.C. 550 million cubic meters of pine has been
killed already and projected losses are more than 900 million cubic metres -
more than 10 years of B.C.'s entire harvest. The B.C. forest industry does
have alternatives. They can invest in the pulp sector leveraging beetle kill
wood, research alternative long-term uses of beetle wood such as engineered
lumber, or the one bright-spot - energy.
    B.C. currently imports 12% of our energy requirements and the target is
to be energy self-sufficient by 2016 with all new electricity projects having
zero emissions. B.C. would like to move closer to the Scandinavian model.
Sweden currently generates virtually all of its heating and cooling from
burning wood waste. "Although our pulp sector doesn't sell power back into the
grid like the more modern pulp mills in South America, we do produce a sizable
amount of power for internal use, avoiding the need to import or otherwise
generate 850MW of power," says Campbell.
    For more information or to arrange an interview, please contact Peter
Zvanitajs, 416-941-8383 x13408, [e-mail] or visit
www.pwc.com/fpp.

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For further information: Peter Zvanitjas, PricewaterhouseCoopers LLP,
[phone] x 13408, [e-mail]; Jim Nelson,
PricewaterhouseCoopers LLP, [phone], Vancouver, [e-mail]