Month: October 2006

The controversial Canada-U.S. softwood lumber deal comes into force today, a day after Domtar announced the closure of four mills in Quebec and Ontario and two days after Abitibi announced the closure of some mills in Quebec. The closure of these mills will result in the loss of about 2,000 jobs but, in a place like Matagami, Que., where Domtar is shortly to exit, there really is no other employer and that means these layoffs could result in the deaths of entire communities. BMO Nesbitt Burns analyst Stephen Atkinson warned earlier this summer that, if the softwood lumber deal passes, it would make it more difficult for forestry companies to maintain operations in Ontario and Quebec and he predicted some would cease operations.

The Softwood Lumber Agreement, if enacted as is, could have a signiicant detrimental impact on the Canadian Paper and Forest Products sector. We would expect shutdowns of both lumber and pulp and paper facilities, especially in the East.
– Atkinson, “The Bad and the Ugly”, analysis of the Softwood Lumber Agreement, published for clients of BMO Nesbitt Burns on July 11, 2006.

Atkinson elaborated on that point when he spoke to the Commons Standing Committee on International Trade on July 31.:

… I don't have any political affiliation.  I look at North American stocks. The weighting of my U.S. stocks that I follow is eight times that of the Canadian. A good reason for that is that the Canadian sector has been shrinking, as we all know.

    My job is to find companies that can earn their cost to capital; it's not a responsibility I take lightly. The business has to be viable. We are in a global economy or global environment, and what it says is that you've got to be low cost; if you're high cost, you go bankrupt, and that's what we've been watching.

    For instance, in eastern Canada the wood costs are more than double what they are in the U.S. south. At the same time, the margins on pulp, for instance, while they are resilient, are over 40% higher, so it's only a matter of time before they continue to get squeezed out . . .

So what do I expect to happen? Well, we have what appears to be the export charge, where B.C. is going to run flat out, and you have the volume restraint, which will be the rest of Canada. When I say B.C., I just mean the B.C. interior, which is about half of our production.

    So it's the worst of all worlds. You can't be half pregnant. It's either that you have a quota or you don't. If you have one running flat out and the other part of the world doing, shall we say, volume restraint, it's not going to work. You're just going to have low prices; that's all it is.

    The way I look at it is that, yes, Canfor and the companies with the pine beetle will run flat out. Canfor will shut down the lumber mills in the non-beetle region. Northern Ontario and Quebec will get beaten up, especially in pulp.

    You see, the insidious thing about all of this is that when you knock out the lumber mills, you reduce the chip supply. When you reduce the chip supply, the wood cost goes up. When the wood cost goes up, down go the newsprint mills and bankrupt go the pulp mills. So the way I look at it right now is that something has to give on the wood costs. Canada has to have the flexibility to be able to lower the wood costs, because as you just think about it, if you knock out the lumber mills and the wood costs keep going up, then that's it: northern Ontario, and certainly the pulp mills in the region, won't be around.

    To summarize where I am, then, it is that looking at the agreement doesn't make me feel very good about recommending stocks to investors, so basically I'm going to have to wait for another day.

Today, at a press conference in Toronto, Prime Minister Harper was asked, essentially, if the softwood deal was a factor that led to the closing of the mills. Here's my transcription of his response:

“No. It's quite the opposite. This is really due to two things. It's due to the softening of the lumber market in the United States which is one of the reasons we had to get the softwood lumber deal signed otherwise things were going to get a lot worse a lot more quickly. There are also some long-term trends in the forest industry that are troubled. There are challenges in the industry particularly on the pulp-and-paper side and we said all along the softwood lumber deal is necessary to provide stability for our industry in the future but it's not sufficient. The government will be coming forward with additional measures to help the industry.”

“We will produce intensity targets over the short, medium, and long-term, and they will cover a range of emissions”
Prime Minster Stephen Harper, Vancouver, Oct. 10, 2006

That line of Harper’s — part of a response to a question from a reporter — sparked outcry and plenty of ink today. It's all about this idea of “energy intensity.” The Globe's Shawn McCarthy has a nice primer in the paper today. Earlier this year, I crunched some data from Statistics Canada on “energy intensity”. So, assuming you understand the concept of energy intensity, you might be interested in these notes I made:

Statscan measures the “energy intensity” of each industry and expresses this measurement in gigajoules per thousand dollars.

Here are the top 10 “energy intensive” industries in Canada in 2002. In this list, less is better — in other words, less energy is used to generate a thousand dollars worth of goods ro services.:

Almost every industrial sector in Canada has become less energy intensive between 1992 and 2004.

Here are the top five industries which have reduced their energy intensiveness the most, as measured in gigajoules per thousand dollars:

Here are the top five industries which have reduced their energy intensiveness the least, as measured in gigajoules per thousand dollars:

Here are the top five industires which have reduced their energy intensiveness relatively the most, i.e. in percentage terms.

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Every year, the federal government requires any company that puts any kind of chemical into the air to report it to the Environment Canada. For its most recent accounting period — 2004 — Ottawa required companies to report the total amount of carbon dioxide, methane and  other greenhouse gases that were discharged. Environment Canada released this data in in June, 2005 and the activists at Pollution Watch have crunched the numbers on the country’s top greenhouse gas polluters. The top five are all in the electricity business and they all rely heavily on coal as the fuel to fire their electricity generating stations.

“We need a federal and provincial strategy for phasing out coal in the provinces that are hfeavily coal-dependent, provinces like Alberta, Ontario and Nova Scotia,” said Aaron Freeman of Environmental Defence, one of the partners behind Pollution Watch. Here’s the list of Canada’s biggest greenhouse gas emitters:

Source: Pollution Watch

Of some note, Ontario Power Generation alone put out nearly twice as much greenhouse gases as every business and home in British Columbia.

TransCanada Pipelines wants to build a 2,960 km long pipeline that would take crude oil from Alberta — mostly from the tar sands – to refineries in the U.S. Midwest. TransCanada has called this US$2.1–billion plan its Keystone Pipeline Project. Today, the United States government gives formal “notice of intent” that it will prepare an environmental impact statement for this project.

The U.S. notice says: “Appropriate regulatory authorities in Canada will conduct an independent environmental review process for the Canadian facilities”.

According to TransCanada, a “Preliminary Information Package” has been filed with the National Energy Board “to initiate and facilitate the environmental assessment review process for the Canadian portion of the Keystone Oil Pipeline under the requirements of the Canadian Environmental Assessment Act. Keystone expects to file a Section 52 application with the NEB for a certificate of public convenience and necessity and other related approvals late in 2006, once we’ve completed supporting environmental impact assessments over the course of the summer.”

Environment Canada has indicated that it will not require an environmental assessment of the project under the Canadian Environmental Assessment Act. Documents filed by TransCanada indicate that no assessment is necessary because the Canadian portion of this pipeline follows existing pipeline rights-of-way, that have already undergone such assessments.