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«Trends and Prospects UNECE Committee on Forests and the Forest Industry November 3, 2015 Prepared by: Policy, Economics and Industry Branch Canadian ...»

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Trends and Prospects

UNECE Committee on Forests and the

Forest Industry

November 3, 2015

Prepared by:

Policy, Economics and Industry Branch

Canadian Forest Service

Natural Resources Canada

November 2015

November 2015


I. An Economic Overview

General Economic Conditions

A complex rebalancing of the global economy is taking place in response to worldwide

economic shocks, such as the fall of oil and other commodity prices and the slowdown of

Chinese economic growth with its spillovers on other emerging-market economies. The situation has been challenging to the Canadian economy. In the first and second quarters of 2015 respectively, the real gross domestic product (GDP) modestly contracted by 1% and 0.6% (annualized), mainly due to the continuing slump in the oil and gas sector, low commodity prices, and weaker than expected export growth.

However, some positive signals indicate that the weakness of economic growth may be temporary. A first encouraging sign is that the largest market destination for Canadian exports, the US, is recovering with real GDP growth reaching 3.7% in Q2 2015. The growing demand associated with increased GDP is expected to buoy Canadian exports. Second, Canadian household final consumption expenditure continues to grow, up 0.6% in Q2 2015, following a 0.1% gain in the first quarter. Third, employment increased by 161,000, up 0.9% in July 2015 compared to the same period in 2014 while the unemployment rate was stable at around 7%. Overall, the Canadian economy is expected to start expanding again in the third quarter of 2015 when the effects of a weaker Canadian dollar are expected to translate into stronger export growth and the GDP growth of the whole 2015 is likely to be positive. However, there remain risks tied to the impacts of a potentially prolonged period of low oil prices on the Canadian economy, volatile global equity markets, the event of a debt crisis in the Euro-zone or an abrupt slow-down in Chinese economic growth, and elevated Canadian household debt levels, which reached a record high in the second quarter of 2015.

One of Canada’s main economic indices, Canadian housing starts, has remained resilient even under the weakening general economy.

They were up 0.8% in the first half of 2015, compared to the same period in

2014. Housing prices have also continued to edge up. In July 2015, Canada’s average housing price was up 5.1% compared to the same period last year, mainly thanks to the low interest rate.

Going forward, the pace of housing starts is expected to slacken slightly this year and next. Relatively strong housing starts November 2015 in British Columbia and Ontario could offset the declines in regions hard hit by the oil price plunge, including Alberta, Saskatchewan, and Newfoundland and Labrador.

Interest rates have been key to the resiliency of Canadian housing and are central to the expectation of an economic rebound in the short term. Between December 2007 and March 2009 the Bank of Canada lowered its overnight rate target (ORT) from 4.5% to 0.5% as the nation’s economy weakened with the onset of the global economic downturn.

In 2010 the ORT was increased to 1.0% and remained unchanged until January 2015, when it was lowered to 0.75%, and then to 0.5% in July 2015 in response to the global economic turmoil, the sharp drop in oil prices, and its negative impacts on growth and underlying low inflation in Canada.

The Canadian dollar exhibited considerable variation during 2004 to 2009. During this period, as a result of the global financial crisis, the Canadian dollar followed the strong fluctuations of the U.S. economy, going from a monthly high of US $1.04 in November 2007, to a low of US $0.79 in March 2009. The Canadian dollar rebounded thereafter, peaking to a new monthly high of US $1.05 in July 2011, and remained roughly on par until February 2013. After a gradual depreciation since 2014, the Canadian dollar’s decline accelerated in

2015. From August 2014 to August 2015, the average monthly exchange rate of the Canadian dollar slid from US$0.92 down to US$0.76. However, the Canadian dollar has performed well against the Euro, remaining almost unchanged over the same period.

November 2015

While the Canadian-US dollar exchange rate is largely driven by the relative strengths of the Canadian and U.S. economy, it is also influenced by commodity prices directly, and oil prices in particular. A major benchmark for North American crude oil is the West Texas Intermediate (WTI). The WTI price increased significantly beginning in 2000, spiking at a monthly price of US $133.88 in June 2008 before falling to US $41.12 in December 2008. The price has recovered since, averaging US $95.60 a barrel over the period from 2011 to 2013. The price of oil collapsed again in late 2014 and the first half of 2015. From July 2014 to July 2015, the WTI was down 50% driven by ongoing excess supply, global economic turmoil and recent geopolitical developments. Over the same period, the exchange rate had dropped 17%. The future trajectory of the exchange rate is unclear: it will depend not only on oil prices but also on the relative impact of oil prices against other major factors such as U.S. and Canadian monetary policies and the persistent Canadian current account deficit.

After nearly a decade of stability (from 2000 through 2008), Canada’s trade balance fell dramatically during the global financial crisis, turning to zero or negative from 2009 to 2013. It rebounded back to $13 billion in 2014.

Canada’s forest products trade balance, which had been decreasing since 2004, has been recovering since 2010 thanks to sizable net exports to the US and rapidly growing exports to emerging economies, particularly to China. The forest trade balance remained positive even during the financial crisis. In 2014, it stood at $21 billion, up 9% from 2013 - a significant contribution towards the rebounce of net trade in the overall economy.

–  –  –

II. Policy Measures in Canada Impacting Forest Management and Forest Product Trade Commitment to Growth and Innovation and to Sustainable Forest Management In 2013, the Canadian Forest Service of Natural Resources Canada (NRCan-CFS) released Growth and Innovation: Rooted in Sustainable Forests1, a strategic framework that guides federal programs, science, and policy initiatives. This framework outlines three key priority areas: supporting forest sector competitiveness, optimizing forest value, and creating prosperity for Canadians.

Sustainable Forest Management Certification

Canada has a comprehensive legislative and regulatory framework that governs forest management in each province and territory, which provides assurances that Canada’s forests are managed sustainably. These laws, regulations and policies govern various aspects including planning land use, forest management, public consultations, Aboriginal participation, protected areas, tenure and allocation for wood for harvesting, and regeneration of forest land. In addition, third-party sustainable forest management certification demonstrates the integrity of forest management practices.

As of the end of 2014, Canada had 161 million hectares of forest land independently certified as being sustainably managed by one or more of three globally recognized certification systems: the Canadian Standards Association, the Forest Stewardship Council and the Sustainable Forestry Initiative.

Competitiveness Initiatives

The Government of Canada is playing a key role in supporting the transformation of the forest sector. In recent years, a number of initiatives have been implemented to help secure a more competitive forest industry by helping the sector develop new products and processes, and take action on new opportunities in the domestic and international marketplace. Since 2007, the Government of Canada has invested $1.8 billion in these areas by: fostering innovation through the Forest Innovation Program and the Investments in Forest Industry Transformation Program;

and market development through the Expanding Market Opportunities Program. Most recently, Budget 2015 allocated $86 million over two years, starting in 2016/17, to extend the Forest Innovation and Expanding Market Opportunities programs.

–  –  –

Innovation The Government of Canada has committed to a suite of programming that spans the innovation continuum from pre-commercial research and development in transformative technologies to later stage programs which focus on proving technologies at the commercial scale.

Forest Innovation Program The Forest Innovation Program (FIP) provides funding to four main areas: FPInnovations, the Canadian Wood Fibre Centre, forest biorefinery collaboration and standards development.

FPInnovations The Forest Innovation Program (FIP) provides funding to FPInnovations, Canada’s national forest research institute, for pre-commercial R&D in transformative technologies. Funded by the federal government, 9 provinces and over 200 industry members, FPInnovations is currently supporting work on some 25 innovations that are at various stages of readiness. From the promise of cellulose filaments (CF) and cellulosic nanocrystals (CNC), to mid-rise and tall wood buildings, to drones providing forest inventory data, to lignin extraction, Canada’s forest products industry is positioning itself to develop new products and penetrate new markets. After less than five years of intense research and development in FPInnovations’ laboratories, a five ton/day CF plant was built within an existing newsprint mill in Trois-Rivièrves, Quebec.

Inaugurated in June 2014, the new CF demonstration plant is now producing a high-quality, world-class, strengthening bioproduct. Additional research by FPInnovations has also helped to develop a commercial application for lignin by an integrated Canadian forest product firm that can be used as a substitute for petroleum-based glues. This has helped the company reduce its supply costs and enable it to produce new, greener plywood products for the marketplace.

Canadian Wood Fibre Centre

The FIP also provides funding to the Canadian Wood Fibre Centre, which is an institutional arrangement that sees government researchers working in an integrated fashion with FPInnovations and academia on forest sector transformation. Its work in forest inventory, fibre characterisation and production, and genomics is helping to ensure that the industry can get the right fibre to the right mill for the right product – in a way that supports industry competitiveness and public confidence.

Forest Biorefinery

The Forestry Biorefinery Collaboration brings together the research capacity of NRCan’s CanmetEnergy and FPInnovations, to further refine the technological solutions needed to support the forest industry’s contribution to Canada’s bioeconomy. The Canadian forest sector sees the bioeconomy as an important pillar in its transformation towards higher value added products.

Biorefinery technologies including bioenergy (e.g. pyrolysis and gasification) and innovative uses of residues (e.g. lignin) are supporting new revenue streams for Canada’s mills which increases their resilience and the security of the employment they provide. As noted above, November 2015 extracted lignin is now being used as an environmentally friendly adhesive in plywood.

Gasification and liquefaction technologies are creating biogas and biofuels that can be used for heat, power, and transportation.

Standards Development The development of national and international standards for novel nanocellulosic materials and their applications is facilitated through FIP. This is being done in order to facilitate the regulatory approval and market acceptance of new products.

Investments in Forest Industry Transformation The Investments in Forest Industry Transformation (IFIT) program was created in 2010 to support Canada’s forest sector in becoming more economically competitive and environmentally sustainable. The initial four-year $100-million initiative supported forest industry transformation by accelerating the deployment of highly innovative, first-in-kind technologies at Canadian forest industry facilities. These projects included bio-energy, bio-materials, bio-chemicals and next generation building products.

IFIT was renewed in February 2014, with an additional $90.4 million provided for the program over four years under Canada’s Economic Action Plan 2014. This continued commitment will help bring the next wave of innovation to market and will solidify Canada’s position as a leader in forest industry transformation.

As part of its renewal, the program created a “Performance Report 2010-2014” designed to provide information regarding how the program operated, what it achieved overall (e.g.

economic, societal and environmental benefits) and how funded technologies were innovative and transformative for the Canadian forest sector. This document will be updated every two years to continue to report on the program’s progress along with that of the proponents it has funded.

The program’s three Calls for Proposals have produced 186 unique applications, demonstrating the sector’s great appetite for transformative projects. To date, IFIT has supported 23 projects across a range of forest sub-sectors and businesses, eleven of which are world-first technologies.

Some of these commercial scale projects emerged through R&D support from NRCan’s Forest Innovation Program, such as the CF and lignin extraction plants. These projects aim to “de-risk” new technologies and encourage broader adoption of the technologies across the industry. They are true Canadian innovation success stories.

Examples of projects funded include:

 Construction of the world’s first cellulose filament plant. Cellulose filaments are long, thin, ribbon-like structures found in the cell walls of trees and other plants that can be used as a reinforcing agent in various pulp and paper and composite products.

–  –  –

 Creation of an engineered fibre mat (EFMs) plant. EFMs which are made of wood and agricultural fibre residues can be used in the manufacturing of parts for vehicle interiors;

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