B.C. Forest and Paper Industry Earnings Decline in 2005; But Pine Beetle Provides Window of Opportunity to Help Pulp Sector Rebuild: PricewaterhouseCoopers

Vancouver, May 11, 2006 — ForestNewsWire.com -- The performance of the British Columbia forest and paper industry dropped sharply in 2005, but because of the pine beetle epidemic the pulp and paper sector has a tremendous opportunity to reinvent itself. These were among the findings released today by PricewaterhouseCoopers (PwC) at its 19th annual Global Forest and Paper Industry Conference in Vancouver.

Preliminary estimates indicate that return on capital employed (ROCE) in the B.C. forest and paper industry fell from 15% in 2004 to 4.1% in 2005. The rising Canadian dollar reduced earnings by over Cdn $1 billion. Lower lumber prices, higher energy costs and transportation challenges also made 2005 a difficult year. ROCE is a key metric of financial health for the industry.

Across Canada, ROCE fell to an estimated 2.5% in 2005 from 4.4% in 2004. This was below the global average of 4.5%, a 1.0% decrease from 2004. These numbers once again fell far short of the 10-12% ROCE target needed to be competitive in the capital markets.

Net earnings of the world's 100 largest forest and paper companies in 2005 were estimated at US$10 billion on sales of US$345 billion. The year before, the top 100 companies earned US$13 billion on sales of US$340 billion. Worldwide, ROCE ranged from 2.3% in Europe to 9.5% in Latin America. ROCE was 2.8% in Japan and 7.0% in the U.S.

In B.C., however, the accelerated harvesting of pine beetle-infected wood in the sawmilling sector has created a glut of wood chips for the regional pulp and paper sector. This is providing pulp producers with the lowest chip prices in the world, around US$120 per metric tonne. Wood chips are the largest input into the pulp and paper-making process and the price is expected to stay abnormally low for the next five to 10 years. If the B.C. pulp industry capitalizes on the window of opportunity of low chip prices and invests in world class technology and retrofits its inefficient mills, it could become globally competitive like never before.

“For years B.C.'s old and inefficient pulp mills have been fading away. But there is a rare second chance to reinvest and restructure and become global leaders in the sector,” says Craig Campbell, leader of PwC's performance improvement practice for the global forest and paper industry. “This is a tremendous opportunity for the B.C. pulp sector. The potential is huge.”

Campbell recognizes that the notion of investing in pulp in B.C. is very contrarian but believes that if B.C.'s pulp and paper sector does not turn itself around, the industry needs to quickly come up with alternative outlets for the massive volumes of chips being produced from the sawmilling sector as a result of the accelerated harvesting of the pine beetle-killed wood. If world class pulp mills are not built, then these low-cost chips need to be converted to engineered lumber, panels, bio-energy and other technologies. If not, there will be no outlet for excess chips and B.C.'s sawmill sector will receive even less revenue from chip sales, even when harvest volumes are reduced after the beetle kill harvest is complete. If the B.C. pulp mills do not take advantage of this opportunity to re-invest, it is very likely more pulp mills will close.

“B.C. pulp mills are far better off than eastern Canadian mills and the reason comes back to the lower chip prices,” says Campbell. “In the east, many pulp producers rely heavily on whole logs and the cost of this fibre has not come down. Many pulp and paper mills in the Prairies, Ontario, Quebec and the U.S. have recently shut down. Eastern mills that have not upgraded their technology are now in jeopardy; we will see even more mills closing east of the Rockies. Even though B.C. mills are no more operationally competitive over their eastern counterparts, they will survive and actually become profitable in 2006 because of dramatically lower fibre costs.”

Reinventing the province's pulp industry would not be without precedent. Over the past 15 years, B.C.'s interior lumber industry has made itself far more efficient and globally competitive by closing down older sawmills, investing and upgrading existing sawmills and consolidating the sector. The results of these efforts have made B.C. sawmilling a world class industry. However, currency levels, prices and duties combined to hammer the sector in 2005.

“The strong Canadian dollar and low lumber prices dramatically lowered earnings for B.C.'s sawmills in 2005. Duties imposed by the U.S. also had a negative impact and took away many of the efficiency advantages the industry has generated,” says Campbell. “2006 could be even worse if things stay the same and housing starts fall off as many forecast. Resolution of the U.S. duties provides some encouragement, but even in this volatile and fragmented sector, B.C. lumber producers remain among the top global performers. The province's sawmills are well positioned to prosper when the industry improves.”

PricewaterhouseCoopers ( www.pwc.com ) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using Connected Thinking to develop fresh perspectives and practical advice. In Canada, PricewaterhouseCoopers LLP ( www.pwc.com/ca ) and its related entities have more than 4,300 partners and staff in offices across the country. (Unless otherwise indicated, “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, Canada, an Ontario limited liability partnership. PricewaterhouseCoopers LLP, Canada, is a member firm of PricewaterhouseCoopers International Limited.)

Contacts:

Peter Zvanitajs
PricewaterhouseCoopers LLP
416 941 8383 ext.13408
peter.zvanitajs@ca.pwc.com

Jim Nelson 
PricewaterhouseCoopers LLP
+1 (604) 806 7047, Vancouver
jim.nelson@ca.pwc.com

info@forestnewswire.com