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### Viewing cable 06TORONTO1144, SOFTWOOD LUMBER: ONTARIO'S STAND

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
06TORONTO1144 | 2006-04-07 10:55 | 2011-04-28 00:00 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Consulate Toronto

`

    VZCZCXRO6373
    PP RUEHGA RUEHHA RUEHQU RUEHVC
    DE RUEHON #1144/01 0971055
    ZNR UUUUU ZZH
    P 071055Z APR 06
    FM AMCONSUL TORONTO
    TO RUEHC/SECSTATE WASHDC PRIORITY 9841
    INFO RUCNCAN/ALCAN COLLECTIVE
    RUCPDOC/USDOC WASHDC

` `

    UNCLAS SECTION 01 OF 03 TORONTO 001144

    SIPDIS

    SENSITIVE; SIPDIS

    PASS USTR FOR MELLE, MENDENHALL, CHANDLER

    E.O. 12958: N/A
    TAGS: ETRD PGOV CA
    SUBJECT: SOFTWOOD LUMBER: ONTARIO'S STAND

    REF: (A) OTTAWA 311 (B) VANCOUVER 358 (C) OTTAWA 172 (D) 05
    TORONTO 1716 (E) TORONTO 1126

    Sensitive But Unclassified -- protect accordingly.

    ¶1.  (SBU) Summary: While major Canadian softwood industry
    officials are pushing the Harper government to return to the
    negotiating table, Ontario forestry association
    representatives are concerned that a negotiated settlement
    will prove elusive.  At the same time, the Ontario
    government struggles to keep its softwood lumber industry
    alive.  Despite past (and likely future) job losses and mill
    closures, the industry will survive in Ontario.  End
    Summary.

    ¶2.  (SBU) Canadian softwood lumber firms are small and have
    a narrow profit margin by global standards.  Canadian
    exporters, feeling the effects of growing competition from
    new exporting countries, are anxious for Canada to resolve
    the softwood lumber trade dispute with the United States.
    Meanwhile, associations representing the Ontario softwood
    lumber industry expressed concern to us about the difficulty
    of achieving a lasting settlement, despite their sincere
    desire to put the dispute behind them.

    Challenges to Negotiations
    --------------------------

    ¶3.  (SBU) Ontario officials tell us that the difficulty of a
    settlement is two-pronged.  First, natural resources,
    including softwood lumber, are under the jurisdiction of the
    provinces, making it impossible for the federal government
    to unilaterally dictate softwood lumber policy.  On a
    positive note, as reported in ref (A), British Columbia (BC)
    Premier Campbell, Ontario Premier McGuinty, and Quebec
    Premier Charest have consulted one another and jointly
    approached the federal government about the elements of an
    acceptable agreement.  Ontario forestry association reps
    highlighted the other difficulty in reaching a timely
    settlement -- they firmly believe Canadian industry should
    hold out to receive all of the cash deposits being held by
    the U.S. under the "Byrd Amendment" per recent WTO and NAFTA
    rulings.  The association reps suggested that some of the
    money collected should be put aside to create a North
    American softwood lumber marketing board to build a stronger
    North American softwood lumber market in the global economy.

    Ontario Forestry Sector as Compared to other Provinces
    --------------------------------------------- ---------

    ¶4.  (SBU) Ontario is Canada's second largest producer of
    softwood lumber, after British Columbia.  It is second to
    the Province of Quebec in pulp and paper production.
    Ontario trees are considered small in comparison to those of
    other provinces, especially BC; the growing season is also
    shorter in Ontario than in BC.  These small Ontario trees
    have to be moved long distances from the north to markets in
    the south via ground transportation.  Ontario cannot compete
    with BC's cheap wood, which is filling the market as a
    result of Ontario's infestation by Mountain Pine Beetles.
    BC mills are much larger than Ontario mills, benefiting from
    economies of scale, and distances to market are much shorter
    than in Ontario.

    Ontario: We Aim to Assist, Not Subsidize Forestry Producers
    --------------------------------------------- --------------

    ¶5.  (U) Ontario's forest-products industry employs some
    30,000 people directly and an estimated 200,000 people
    indirectly, and has annual sales (including exports) of
    around C$27 billion.  In many parts of Northern Ontario,
    forestry is the only economic engine; representing 75% to
    85% of the tax base.  In recent years, forest products have
    been Ontario's second largest contributor to the provincial
    balance of trade after the auto sector, according to the
    Ministry of Natural Resources' (MNR) Advisory Council on
    Forest Sector Competitiveness 2005 report.  More than 4,000
    Ontario forest industry jobs have been lost in the last year
    due to mill closings, in a continuing downward spiral of job
    losses over the years.  The government has been seeking ways
    to help the industry overcome the challenges of the recently
    strengthened Canadian dollar, the emergence of lower-cost
    offshore softwood producers and skyrocketing Ontario
    electricity costs.

    ¶6.  (U) As with other OECD countries, Canada's (including
    Ontario) stated policy has generally moved away from adding
    production capacity toward more broad-based strategic
    practices such as assisting research and development.

    TORONTO 00001144  002 OF 003

    ¶7.  (U) In the Ontario Government 2006 Budget, delivered on
    March 23 (ref (E)), provincial Finance Minister Duncan
    announced that, in addition to the federal government's
    November 2005 offer of a C$1.5 billion, five-year national
    program to help forest companies, workers and communities,
    the Ontario Government will offer its own aid package.  This
    package consists of C$350 million in loan guarantees to
    stimulate new investment in plant and equipment; C$150
    million in grants to encourage power co-generation, energy
    conservation and more value-added wood products; C$28
    million annually to help fund forest access roads; C$10
    million annually to fund enhanced forest resource
    inventories; C$5 million over five years to promote new and
    innovative wood products; and would streamline forestry-
    related regulations and approval processes.  In addition to
    these initiatives, the Ontario Government recently announced
    increased funding for forest access roads from C$28 million
    to C$75 million per year; a one-time C$70 million refund in
    stumpage charges; and a three-year C$3 million annual
    reduction in stumpage charges for white birch and veneer-
    grade poplar.  In addition, the Ontario Government is
    proposing to parallel federal tax measures to support co-
    generation.

    ¶8.  (SBU) Electricity costs are higher in Ontario than
    almost any other jurisdiction in North America.  In response
    to this, the Ontario Government announced a three-year
    extension to a proposed revenue limit on a portion of
    Ontario Power Generation (OPG)'s assets to help stabilize
    electricity costs across all industries in Ontario;
    electricity costs have been blamed for recent mill closures
    in Ontario's forestry sector (Note: OPG is owned 100% by the
    Province of Ontario, and produced 70% of Ontario's
    electricity in 2005. End Note).

    What These Announcements Mean
    -----------------------------

    ¶9.  (SBU) The Ontario lumber mills that have avoided closure
    are highly leveraged and, without provincial loan
    guarantees, face great difficulty in acquiring financing
    from banks for needed capital investments.  The loan
    guarantees, as well as the other government offerings,
    above, were recommendations in the MNR's Advisory Council on
    Forest Sector Competitiveness 2005 report (which contained
    twenty six recommendations, and have all been implemented by
    the Ontario Government).  The Advisory Council on Forest
    Sector Competitiveness was led by Don Roberts, a leading
    forestry analyst from CIBC World Markets (ref (D)).

    ¶10.  (SBU) The C$350 million in loan guarantees and C$150
    million in grants aim to create more energy independence in
    the industry by promoting energy conservation and co-
    generation from biomass (using black liquor), a process used
    widely in Europe.  This approach should lessen industry
    dependence on coal-generated electricity, and enable better
    use of wood fiber through better pulping techniques.

    ¶11.  (U) Starting in May 2006, when OPG's revenue on energy
    produced by unregulated facilities (includes "intermediate
    and peaking hydro" as well as coal stations; excludes
    "baseload hydro" and nuclear power generators) exceeds C 4.6
    cents per kilowatt hour, the province directs that OPG issue
    a rebate to all Ontario electricity consumers, including
    residential, commercial, institutional and industrial
    consumers.  In May 2007, the revenue limit will be increased
    to C 4.7 cents per kilowatt hour and in 2008, to C 4.8
    cents.  The revenue limit differs from a price cap because
    OPG's generation output is bid on by distributors in the
    open electricity or spot market, where the price varies
    according to supply and demand.  The total amount of the
    rebate will depend on the difference between the market
    price and the revenue limit, as well as how much output is
    produced by OPG's non-regulated plants.

    ¶12.  (SBU) The C$75 million funding for forest access roads
    is earmarked primarily for fire access roads and roads
    connecting communities that do not have access to existing
    paved roads.  These provincial forest roads are used by a
    variety of industries.  The Ontario Government covered the
    cost of these roads, until former Premier Bob Rae's NDP
    Government downloaded them to industry in the early 1990s.

    ¶13.  (SBU) Most of the trees harvested (88%) in Ontario are
    located on public or crown land, a resource managed by the
    provincial government on behalf of the people of Ontario.
    The cost of updating forest resource inventories (FRIs) was
    downloaded to industry by the provincial Conservative
    Government of former Premier Harris in the 1990s.  The
    current Liberal Government of Premier McGuinty has set aside

    TORONTO 00001144  003 OF 003

    C$10 million to pay for FRIs.  MNR expects these inventories
    will be compiled through satellite images and topography,
    rather than through more costly labor-intensive methods.

    ¶14.  (SBU) Ontario government officials hope that innovative
    value-added wood products will boost Ontario's forestry
    industry.  They cite oriented strandboard (OSB) (a composite
    construction material made of poplar strands or wafers and
    resins, developed in the 1970s, but now used extensively in
    housing construction), and engineered lumber as products
    that could help offset the industry losses from declining
    demand for newsprint.

    Stumpage Fees
    -------------

    ¶15.  (SBU) The Ontario Government announced on February 22,
    2006 that it would retroactively reduce stumpage fees for
    all softwood and hardwood species for 2005-6 by refunding
    C$70 million to the industry, and for three years, reduce
    stumpage charges by C$3 million annually for white birch and
    veneer-grade poplar located on crown land.  The stumpage fee
    is paid by companies or individuals to the MNR for the
    privilege of cutting trees from public land.  The stumpage
    fee reduction was not something that was recommended in the
    report from the MNR's Advisory Council on Forest Sector
    Competitiveness.  Natural Resources Minister Ramsay hopes
    companies will use the capital infusion to invest in their
    Ontario facilities.

    ¶16.  (SBU) Both birch and poplar trees are fast-growing and
    considered under-utilized species.  These reductions,
    combined with road construction, are expected to reduce the
    cost of wood delivery for Ontario producers by more than C$4
    per cubic meter on average over the next three years.  The
    cost of delivering wood to mills in Ontario is about C$55
    per cubic meter, compared with a worldwide average of C$35.

    Comment
    -------

    ¶17.  (SBU) The province's investments have come too late for
    many mills, including Abitibi-Consolidated's 80 year old
    Kenora mill, which shut down just before Christmas,
    eliminating 320 unionized jobs from that remote community.
    The company blamed the shutdown on high production costs in
    Kenora, especially high electricity costs.  On the other
    hand, top energy professionals do not expect Ontario's
    electricity crunch to be resolved until subsidies are
    replaced by full-market pricing for electricity.  Critics
    say that reducing stumpage fees is not going to solve the
    industry's electricity problem, though sawmills may benefit
    more than paper mills because they do not consume as much
    energy.

    ¶18.  (SBU) Ontario's latest forestry policy is not going to
    stop the inevitable closure of older, smaller Ontario
    sawmills.  To remain competitive, Ontario producers will
    have to shift their focus to state-of-the-art and mega mills
    through mergers and acquisitions.  Abitibi-Consolidated is
    still the fourth largest softwood lumber producer in Canada,
    after Canfor, West Fraser Timber and Tolko, producing 2,108
    million board feet in 2005.  Through consolidation and
    focusing on new markets, the Ontario softwood lumber
    industry will survive, but not without casualties.  The
    Ontario Government believes their investments are not trade-
    distorting subsidies under WTO rules.  However, Ontario
    Natural Resources Minister Ramsay's decision to reduce
    stumpage fees has raised suspicion among U.S. producers.

    TUNIS

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