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