Downturn signals tougher times ahead for industry.

Decreased earnings has been a common theme over the past several months as lumber and pulp and paper companies continue to report losses, and it is something Lakehead economics professor Liveo Di Matteo says could get worse before it gets better.

Di Matteo has been watching with interest what has been happening to the industry as various forces have played themselves out over the past several months. Companies reporting losses, such as Tembec, Domtar and Abitibi-Consolidated, point to the weakening U.S. dollar, which has narrowed profits from exports to the U.S. and the softwood lumber dispute which has cost the Canadian lumber industry nearly $2 billion in countervailing and anti-dumping duty payments.

According to Di Matteo, the biggest risk now to add onto these issues is a weakening U.S. economy that would drive down the demand for housing.

"(Forest companies) have already had to put up with the lowering (American) dollar and the unresolved nature of the softwood lumber," he says. "Add a cyclical downturn in the economy, things could actually get worse in the short-term rather than better.

"The U.S. economy has been doing well, but it hasn't been creating jobs," Di Matteo says. "I think, unless there is a resolution to the softwood lumber issue, the difficult times I suspect will continue ... if the dollar stays steady or depreciates, I think you can expect to see employment increase in the forest industry. But there's no sign the dollar is going to do that. If the economy picks up in terms of (gross domestic product), that will fuel demand. If the lumber dispute is resolved, that should have a positive effect on the industry."

Abitibi-Consolidated reported a fourth-quarter loss of $80 million in 2003, compared to net earnings of $29 million in the same quarter of 2002. Sales in the fourth quarter amount to $1.2 billion compared with $1.3 billion in Q4 of 2002. The company reports fourth-quarter income was negatively impacted in part by the stronger Canadian dollar, but partly offset by lower production costs and higher prices for newsprint and lumber.

Abitibi-Consolidated spokesperson Marc Osborne says the company has seen a demand for newsprint "not as robust" as the company would prefer, but the expectation is that prices in 2004 will be "marginally better."

"We have announced a price increase and we are in the process of implementing it. We're hopeful it's going to go," he says. "On the lumber side, we've also paid $18 million in countervailing duties. We're not worried about how long this can continue at all; there are plenty of financial resources for many, many other quarters."

Also reporting a fourth-quarter loss was Bowater, with a net loss of $50.9 million on sales of $735 million, slightly less than a net $66.6-million loss on sales of $666.3 million in the fourth quarter. For the entire year 2003, the company reports a loss of $205 million, the result of several "unusual" events, including weather-related fiber costs increases, fiber-shortages at Bowater's Ontario operations, closure of a Quebec paper machine and completion of a major capital program at the company's South Carolina mill.

Domtar reported a $700-million loss of sales from $5.4 billion in 2002 to $4.8 billion in 2003. In addition to such issues as softwood duties and the weakened U.S. dollar, the company also experienced extremely low prices resulting from increased supplies of paper from other paper-producers.

"We've not experienced these kinds of market conditions in 10 years," says Domtar vicepresident of communications William George. "We've not only had to deal with a weaker U.S. dollar, we've also had to deal with a market that was very slow and so prices were very low. When we saw those prices, we took some hard decisions, which affected our bottom line, but which we believe were the right ones to take to protect the value of our product in the marketplace--including some downtime--because we did not want our product associated with that price level.

"We have a strong balance sheet. Our leverage is the lowest when compared to some competitors," he says. "They don't have that luxury. They need to generate cash in order to cover their costs." Tembec also reports a first quarter gross sales loss from $840.8 million ended Dec. 27, 2002 to $766.3 million in the same period in 2003. The company indicates a slight increase in sales in its forest products group, but an increase offset by a drop in spruce-pine-fir (SPF) prices and impacts on counter-vailing and lumber duties in its oriented-strand board (OSB) segment. The pulp and paper group also reported negative sales impacted in the pulp group by increased manufacturing costs. The company's paper segment lost out from a weaker U.S. dollar.

If there is one bright spot, it is with Weyerhaeuser, which recorded slightly less net earnings of $92 million on higher net sales of $5.1 billion in Q4 of 2003 versus $126 million net earnings on $4.7 billion net sales in the same quarter of 2002.

"We did quite well compared to the fourth quarter of last year," says company spokesman Bruce Amundson.

Realizing economies of scale

Amundson says cross-border disputes and the relationship between the U.S. and Canadian dollar have had effects on Weyerhaeuser's bottom line, but one of the biggest challenges to the North American industry is competition from Europe and Asia.

"It really points out fairly well how much more global the industry has become," he says, adding that consolidation is another trend that is catching up to the wood industry.

The advantage of consolidation within the industry--namely bringing together smaller operations under a larger umbrella to realize more efficient economies of scale--is now being realized.

Consolidation is something that Weyerhaeuser is now pursuing, he says.

"We have made some significant acquisitions over the last few years. Two of the largest were our merging with MacMillan Bloedel (in 1999) and our acquisition of Willamette Industries (2002), along with the fact that we're paying off our debt ... we view ourselves as a company that will thrive in the era of consolidation," says Amundson.

www.domtar.com

www.weyerhaeuser.com

www.abitibiconsolidated.com

www.tembec.com

www.bowater.com

www.lakeheadu.ca

By ANDREW WAREING

Northern Ontario Business