VZCZCXYZ0008
RR RUEHWEB

DE RUEHOT #0902/01 0881301
ZNR UUUUU ZZH
R 291301Z MAR 06
FM AMEMBASSY OTTAWA
TO SECSTATE WASHDC 1944

UNCLAS OTTAWA 000902 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
PASS USTR FOR MELLE, MENDENHALL, CHANDLER 
 
E.O. 12958: N/A 
TAGS: ETRD CA
SUBJECT: SOFTWOOD LUMBER: COMPANIES URGE RETURN TO TABLE 
 
REF: (A) OTTAWA 311; (B) VANCOUVER 358 
 
¶1.  (SBU) Summary:  Major Canadian softwood industry 
officials tell the Embassy that they are pushing the Harper 
government for a quick restart of lumber negotiations, and 
advising Canadian officials not to waste time trying to 
reach full consensus in the industry.  The officials 
understand that B.C., Ontario and Quebec are working with 
the Canadian government on the parameters of a deal.  They 
would like to see a long-term agreement that would avoid 
another round of disputes ("Lumber V") -- and expect a 
solution to the softwood lumber problem to be highly 
complex.  End summary. 
 
¶2.  (SBU) On March 24, Charge d'Affaires, Econ Minister- 
Counselor and Econ Officers met with officials from 
Weyerhaeuser, Canfor and Abitibi Consolidated (protect), who 
together represent a significant proportion of the Canadian 
lumber industry and have operations throughout the West, 
Ontario and Quebec, as well as in the U.S.. The company 
executives were in Ottawa to lobby Cabinet ministers in the 
run up to the March 30-31 Leaders' NAFTA Meeting in Cancun; 
they told us they are staking their hopes on the POTUS- 
Harper meeting to kickstart a new lumber negotiation. 
 
Message: Just Do It. 
------------------- 
 
¶3.  (SBU) The industry officials told us what they are 
telling Canadian ministers: we have a short window of 
opportunity, before the November 2006 U.S. Congressional 
election campaign and a Canadian Parliamentary election 
which could take place relatively soon, to conduct (in the 
words of Trade Minister Emerson) "swift and efficient 
negotiations" to reach a deal.  They are encouraged by a 
perceived moderation in tone among U.S. industry and 
consumer players at the recent Senate Finance Committee 
hearings and heartened by the US-Mexico settlement on 
cement, the other iconic NAFTA trade dispute.  Echoing 
earlier industry comments (reftel), they say that 
governments should not wait for full industry consensus on 
either side, and that the time for big industry 
consultations has passed.  Their companies are prepared to 
step back from day-to-day involvement in talks; in their 
view, governments should cut a deal and ignore the 
inevitable opposition from individual firms since no deal 
will satisfy everyone.  In their view the government needs 
to reach a settlement quickly because it cannot afford a 
renewed provincial schism among B.C., Ontario and Quebec. 
They believe the message is falling on receptive ears in 
Ottawa, although the new Harper government is still 
struggling with staffing issues. 
 
But Not At Any Cost 
------------------- 
 
¶4.  (SBU) Nevertheless, the forest industry officials 
stressed that there are limits to what industry will accept. 
Any deal has to recognize the current status quo, factoring 
in both the stronger Canadian dollar over the past two years 
and the "legal environment," (the results of the NAFTA 
dispute settlement process and ongoing litigation)   Also, 
any lumber deal cannot "discriminate against one province" 
(presumably meaning B.C.).  They also suggested (also a 
recurring theme) that U.S. industry would also have to 
become more realistic in its expectations for a deal. 
 
Where Are the Provinces? 
------------------------ 
 
¶5. (SBU) In response to a question about provincial 
politics, the industry executives said that B.C., Ontario 
and Quebec Premiers Campbell, McGuinty and Charest have been 
consulting closely and have made a joint approach to the 
federal government on elements of an acceptable agreement. 
Alberta, the fourth biggest lumber producer, still hasn't 
come to the table at the political level but Alberta 
come to the table at the political level but Alberta 
officials are participating in technical meetings. 
 
 
¶6. (SBU) The executives were somewhat defensive about the 
March 24 announcement by the Province of Quebec of new 
proposed aid to forest products companies of over 900 
million CAD in the next four years.  They argued, among 
other things, that forest operations in the U.S. in some 
cases receive similar support from state governments.   We 
took the opportunity to remind them that this package, like 
the previously announced Ontario and federal government 
assistance packages, made it more difficult to make the case 
for resolving the issue. 
Elements of a Deal 
------------------ 
 
¶7.  With the disclaimer that they have no "specific 
conclusion" on what a deal should include, the industry 
representatives floated various thoughts on the key elements 
of a settlement.  First of all, they expect any agreement to 
be quite complex, given the number of elements in play, but 
urged governments to avoid trying to "re-construct the 
forest sector." (Comment: this implies that wholesale 
changes in stumpage and other provincial practices would be 
unlikely to be on the table.  End Comment)  They would like 
to see a long-term agreement, e.g. at least seven years in 
duration, in order to allow Canadian firms to adapt to the 
structural shifts now underway in the industry and the 
looming effects of beetle kill in B.C.  They thought that 
some of the ideas floated during previous bilateral 
discussions last November should be revived, such as 
elements on market share and volume and some kind of a floor 
price mechanism that would avoid oversupply and wild 
downswings in price as housing starts fall in the U.S.  With 
regard to market share, one industry representative proposed 
that any market share percentage should be based on total 
imports into the U.S. lumber market rather than Canadian 
imports, giving the Canadians a chance to compete directly 
against Europeans and other new entrants that have snapped 
up U.S. market share.  On the touchy question of deposits, 
they only said cautiously that "something could be done." 
They clearly expect that a "large portion" of the deposits 
would eventually be returned to Canadian companies.  They 
also repeated the call for a binational panel to oversee the 
agreement. 
 
The Future of the Canadian Forest Industry 
------------------------------------------ 
 
¶8.  (SBU)  The industry representatives also offered their 
thoughts on the future of the Canadian industry.  Beetle 
kill (ref. B) is a critical problem for operations in the 
B.C. interior; existing mills will increasingly wind up 
being surrounded by dead trees and the cost of hauling logs 
from ever-more distant living stands will skyrocket. 
Everybody expects the forest products sector to be 
consolidated into fewer, bigger companies, but with a trend 
away from integrated forestry operations (because capital 
demands are "too significant") towards companies 
concentrating on specific product lines; e.g. spinoffs of 
pulp production, under pressure from fast-growing Southern 
Hemisphere imports.  For instance, Abitibi is developing a 
market niche in dealing with recycled paper.  Increasingly, 
Canadian forest producers see a future in the energy sector, 
possibly replacing lost pulp and paper exports with 
electricity exports to the U.S. market.  (Comment: Ontario's 
recent announcement that it will pay subsidized rates to 
alternative energy producers suggests that provincial 
officials, faced with serious structural adjustment problems 
in forest communities, are likely to encourage this 
development.  End Comment.) 
 
 
 
WILKINS