Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 7 - Evidence - June 10, 2010
OTTAWA, Thursday, June 10, 2010
The Standing Senate Committee on Agriculture and Forestry met this day at 8:06 a.m. to study the current state and future of Canada's forest sector.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: Good morning honourable senators and witnesses. I wish to welcome you to this Standing Senate Committee on Agriculture and Forestry.
My name is Percy Mockler. I am a senator from New Brunswick and chair of the committee. Today, honourable senators, we welcome witnesses from three organizations: Craig Crawford is President and Chief Executive Officer of the Ontario BioAuto Council. Chadwick Wasilenkoff is Chief Executive Officer of Fortress Paper. Suzanne Kiraly is Executive Vice-President for Government Relations with the Canadian Standards Association.
The committee is continuing its study on the current state and future of Canada's forest sector, looking particularly at bio-products. I note that Ms. Kiraly is here to talk to us about the standards relating to boilers for biomass. Before I ask the witnesses to make their presentation, I will to start by asking honourable senators to introduce themselves individually.
Hon. Terry M. Mercer: I am Senator Terry Mercer from Nova Scotia.
Senator Robichaud: I am Senator Fernand Robichaud from New Brunswick.
Senator Fairbairn: I am Senator Joyce Fairbairn from Alberta.
Senator Mahovlich: I am Senator Frank Mahovlich from Ontario.
Senator Plett: I am Senator Donald Plett from Manitoba.
Senator Ogilvie: I am Senator Kelvin Ogilvie from Nova Scotia.
Senator Eaton: I am Senator Nicole Eaton from Ontario.
Senator Rivard: I am Senator Michel Rivard from Quebec.
The Chair: Honourable senators, our witnesses handed the clerk copies of their presentation in one of the official languages. I need consensus to permit the presentation to be distributed now and that the translation be sent once it is available.
Some Hon. Senators: Agreed.
The Chair: We have a consensus.
[Translation]
Senator Robichaud: Mr. Chair, I did not hear.
The Chair: Witnesses have given the clerk copies of their presentation in only one official language.
[English]
Witnesses, we thank you for accepting our invitation to appear before the Senate committee. Our mandate is to examine and promote the development and marketing of value-added products, to examine education in the wood science sector and to develop a vision for government and all stakeholders for the long-term positioning and competitiveness of the forest industry in Canada. We look forward to your presentations. I am informed that Ms. Kiraly will present first to be followed by Mr. Crawford and Mr. Wasilenkoff.
Suzanne Kiraly, Executive Vice-President, Government Relations, Canadian Standards Association: Mr. Chair and members of the committee, it is my honour to be here today to address prior commentary on North American and European biomass boiler standards. Before I begin, I will give you an overview of the CSA and the important work we do on behalf of Canadians.
CSA is an independent, not-for-profit, member-based association that serves business, industry, government, consumers and other interested parties in Canada and around the world. We were established in 1919, and CSA is accredited by the Government of Canada to produce national standards.
What makes our standards credible is our consensus process, which draws upon the expertise of our 7,500 members from across the country that represent the diverse views of industry, consumers, academics, government and non-governmental organizations. Our organization has developed, and maintains, more than 3,000 standards and codes, as well as information products for safety, design and performance in the areas of health, energy and sustainability.
In addition to developing standards for Canadians, CSA is active in regional and international forums to represent the Canadian perspective and to work toward solutions that are harmonized with the U.S. and international positions. CSA has published over 100 North American standards and has adopted more than 500 international standards.
We are very proud to advise honourable members that on behalf of Canada, CSA has led the development of three of the most prestigious international standards initiatives. They include: quality management, also known as the ISO 9000 series; environmental management, or the ISO 14000 series; and greenhouse gas management, also known as the ISO 14064 series.
I apologize if I speak in numbers and acronyms; it is a condition of standardization that somehow does not always fall out of my mouth.
As a standards development organization, CSA functions as a neutral third party, providing a forum for committees of experts to work within a rigorous and fair process. Our technical committees are created using a balanced matrix approach, which capitalizes on the combined strength and expertise of those volunteer members, with no single group dominating.
Working within the CSA process, our technical committees consider the views of all participants and they establish the standards' requirements through a consensus-based process that promotes inclusive participation, respect for diverse interests and transparency. When a draft standard has been agreed upon, it is submitted for public review so that any interested person or organization can read it and comment on it. The draft is amended, if necessary, and then submitted to the technical committee for formal approval before it is published.
Once a standard is published, CSA continues to maintain it. CSA will make amendments as needed to keep the standard up to date — for example, to reflect changes in technology. Each standard is reviewed at least every five years to keep it current.
As committee members may know, CSA is not a government body, and our standards are voluntary until they are referenced by some level of government in legislation. Currently, about 40 per cent of our standards are cited in legislation at the federal, provincial, territorial, state and municipal levels across North America.
CSA believes that the federal government should make it a practice going forward to mandate the use of standards in support of future legislation to ensure the diverse viewpoints of Canadians are represented and that consensus supporting our standards enhances the integrity of regulations being proposed by government. Perhaps that is a matter we should discuss at a later date.
Chair, following the meeting of May 11, 2010, of the Standing Senate Committee on Agriculture and Forestry, CSA was invited to appear before you today on four items regarding biomass boilers: standards; possible mutual recognition of European boiler standards; possible amendment of regulations for boiler engineers; and provision of a stance on the European standards. I will address each point in the order listed, beginning with standards.
In Canada, most boilers are covered by a CSA standard that governs the construction, installation and operation of boilers installed anywhere across this country. This is made possible because the standard is referenced in federal and provincial legislation in every Canadian jurisdiction. This standard, known as the boiler code, also references the major U.S. boiler code, which results in a similar or harmonized approach to this equipment on both sides of the border.
CSA also has a standard that covers the performance of solid fuel-burning heating appliances. It covers appliances that burn biomass fuels, including wood pellets, and it determines both the emission and energy efficiency rates for such products. This standard is typically used to test units with outputs of less than 150 kilowatts. This standard, known as CSA B415-09, is utilized by the Environmental Protection Agency in the U.S. and is based on other U.S. standards.
The EN305-5 standard for small biomass boilers covers appliances up to 300 kilowatts. In Europe, the pressure equipment directive — PED 97/23/EC — governs larger boilers. Provincial regulations in Canada stipulate that boilers designed using the European standards are required to meet either Canadian or U.S. boiler code requirements in order to be used in Canada.
Typically, CSA will ask its members to consider the values used in existing standards before creating a new requirement. Often, because of industry, regulatory or specific safety concerns, a different rule may be developed.
While I do not know the exact history on these two standards, a clear difference between the Canadian standard and those in Europe lies with the heating values of fuel used to determine the thermal inputs to the appliances. In Canada, we use the higher heating value of the fuel to calculate thermal efficiencies, where European standards use the lower heating value. This difference in standards translates to optically higher efficiency numbers for appliances using the European standards. Industry's concern is likely related to potential differences between the European and North American standards and how those differences may impact product design or cost.
Where it is practical, CSA's first approach is to harmonize its standards with international standards. The decision about what level or what standard should be used is something that is typically resolved through discussion with affected stakeholders — government, industry, utilities and consumers. I should note, chair, that the CSA stands ready and willing to facilitate a round-table discussion among stakeholders on the topic of differences in European and Canadian standards, and to arrive at a workable solution that will benefit all parties.
The second point is on mutual recognition of European boiler standards. The reality is that there are significant differences among countries in regulating the supply and operation of boilers and pressure equipment. These differences include compliance with specific standards, limiting of source or specification of materials, use of specific inspection bodies and certification systems or import licences. For European standards to be recognized in Canada, there will need to be a comparison of these codes and a detailed understanding of the differences and similarities.
CSA is unaware of any discussions that may have occurred, or are occurring, on the use of European boiler standards in Canada, although this item may be a part of the Canada-European Union trade agreement negotiations. If an initiative takes place to review and potentially adapt EU standards in Canada, part of the process will be to engage the appropriate organizations and stakeholders connected to the standards. As I mentioned earlier, CSA is willing to lead such an initiative if called upon by the government.
The third point is amendment to regulation. The provinces and territories develop and amend boiler and pressure vessel safety regulations in Canada. CSA has no authority in this regard. However, the CSA standards process can be used to harmonize regulations. As a matter of fact, the CSA Canadian boiler code was created from interprovincial regulations more than 60 years ago to facilitate the application of uniform safety requirements for boilers and pressure vessels in Canada.
CSA B51, our boiler code, is referenced in regulations by all 13 Canadian provinces and territories. Since CSA standards are reviewed regularly to ensure currency and to support regulatory or product changes, the CSA technical committee could discuss changes to the codes that might support any amendments required to legislation.
The fourth point is CSA's stance on European standards. As a neutral third-party solution provider, CSA does not have a stance on specific standards, but instead, defers to the consensus of our expert membership. CSA strives to support the needs, priorities, interests and objectives of Canada's forestry and boiler industries, the appropriate government bodies and affected stakeholders in Canadian society.
I also note in closing that I have a summary of the regulations I have referenced during my presentation, which I am willing to leave for the committee.
I will be pleased to answer any questions you may have on CSA and the standards development process.
Craig Crawford, President and Chief Executive Officer, Ontario BioAuto Council: Chair and honourable senators, we are pleased to have this opportunity to speak to this issue of bio-products in the forest sector. I will make general comments rather than go through the background material. I want to make three points.
First, I will describe briefly what the BioAuto Council is and how we started. Second, I will describe why we think the forest sector is important and how it relates to the auto sector. Third, I will talk briefly about some of the issues that we think need to be addressed going forward.
The BioAuto Council is an industry-led not-for-profit organization. Our members include the large Canadian auto parts companies like Magna, Woodbridge and Canadian General Tower. These auto parts companies are global companies with global reach. We also have members from outside of Ontario. These members are large chemical and large industrial bio-tech companies such as DSM, which is in the Netherlands, Dow, DuPont and Cargill in the U.S. and Braskem in Brazil. Our members include FP Innovations, which is the forest industry's large research group, the National Research Council and many universities.
Our mission is to become a world leader in the use of these bio-based products in the auto sector, but any technologies that we can drive into the auto sector we also try to introduce into other sectors like construction, packaging and so on.
We are interested in the forest sector because we think that in the future the kinds of chemicals and high-performance products that we can produce from forestry will make the manufacturing sector and the auto sector more globally competitive. We think the forest sector can be a source of important chemicals and plastics and important high-performance fibres that we can use to add to plastics to make them as strong as steel so that we can light-weight cars.
We think that these materials that come from forestry can help control the costs of raw materials that the auto sector uses; that we can make better performing parts; and that the materials and parts that we make and the processes that we use to make these parts can have important environmental benefits including reduced greenhouse gases and reduced use of toxic chemicals.
An important message is that any money that the provincial and federal governments spend in forestry does not help only the forest workers. It will have huge benefits for the downstream chemical industry and downstream manufacturing. Every dollar that we spend in forestry is money well spent and will support reinvestment in a new future for our forest industry.
There are three issues that we believe are critical for governments and industry to focus on. We currently have policies that seem to focus on putting money into biomass to energy and biomass to fuels. However, there is not a priority in government for investing in chemicals and high-performance bio-materials. We think the way to handle that situation is to develop a model of a bio-refinery where a pulp mill can produce not only pulp, energy and fuels, but over time, can produce higher-value-added chemicals and high-performance materials.
We are not saying that we should not put money into fuels or energy but we need to extend these policies and programs so that they allow investment in chemicals and high-performance materials.
The second area is still an emerging one, and we need money for demonstration and scale-up plans. There are all kinds of new technologies. These companies will find it difficult to access venture capital to invest in these new demonstration plants and the companies can benefit from loans from government to help with this process.
The third area is product and market development. Government likes to invest money in research and development. It is great to spend billions of dollars in research, but if we do not turn that research into products that create jobs and wealth, this money will not be well spent. We have to complete the process of generating products.
In the case of the auto sector, when we make a part out of a forest product, literally dozens of tests must be performed on the materials. It may cost $1 million or $2 million and two years of time for the testing process. It is time consuming and expensive, and it can be risky. We need to focus on helping companies go through the performance testing for these new materials.
We also need to spend more time on market development. When someone builds a chemical plant, it takes about 10 years to build up the market to sell out that chemical plant completely. We need to focus on building markets and try to have those new bio-chemical plants working at full capacity as quickly as possible.
We suggest that governments need to focus on bio-refinery, demonstration and scale up, and new product and market development.
I will be happy to answer any questions.
Chadwick Wasilenkoff, Chief Executive Officer, Fortress Paper: Good morning, ladies and gentlemen. Thank you for having me here today to hear a different view on the industry.
My background is as a contrarian investor, first and foremost, and an entrepreneur. I typically look for investment opportunities in areas that are heavily out of favour, where other investors typically would not like to tread. When gold was $275 an ounce, I was able to secure two gold mines. When oil was $15 a barrel, I built up two oil and gas companies. When copper was 80 cents and seemed to be going lower, I bought a copper mine. When uranium was $8 to $9 and no one was looking at that space, it having been in a 25-year decline, I was able to secure assets from Cameco.
That background is what led me to the forestry sector. Everything else was going through profitable and robust times, but the forestry sector continued to lag across the board. When I started evaluating the forest sector and the various opportunities within it, it became apparent that it was in a structural, not a cyclical, decline. I do not believe that the sector will come back in the short term; we will have to wait it out. People are no longer using newsprint the way they used to. This decline is a change in attitude and use of our forest products.
We find the same thing with commodity paper; photocopy paper and such things.
As I evaluated different forestry companies — and I looked at pulp, lumber, and commodity paper companies — I found there were several key elements, especially in the Canadian forestry sector. First, they need to secure fibre. Unfortunately, Canada has fairly slow-growing fibre compared to Brazil, so it is a challenge trying to operate in this environment. Everyone seems to be moving to areas where there is more leniency on environmental policy. Again, some of these other countries have a competitive advantage.
Second, this business is capital intensive, both at the paper mills and at the pulp mills. If anything breaks, the cost starts at a million dollars either to repair the part or to replace it, and the cost quickly escalates from there. It is also difficult, as mentioned in your report, to attract investors or capital these days. There is a lot of negativity around the sector. I also found that if a company wants to be efficient, effective and competitive on a global basis, the price tag typically starts in the billions. Again, this poor investor sentiment makes it challenging.
The third large input cost is labour. While Canada has an incredibly skilled and talented labour force, it is difficult to compete on a global basis compared to some of these other regions. We need to focus on the talent of those people and not only the sweat equity of those particular individuals. I know your task here is to try to save the entire forestry and agricultural industry. You have a monumental task ahead of you; I do not envy your position.
One major challenge that I have seen, as I looked at a lot of these different forestry companies and investment opportunities, especially here in Canada, is that the management teams and the companies themselves are focused on and entrenched in the cost structure. As I said, they are focused on this fibre supply and how they can save a few extra cents, the capital-intensive side of the business.
We read about Canadian mills and a lot of European mills all the time. They are shutting down and layoffs are occurring. These mills are older mills with more antiquated equipment. Generally, they are not nearly as competitive. Regarding the labour force, the mills are constantly trying to negotiate with the unions to bring labour costs down. The mills are trying to optimize this equipment that is older and antiquated. The challenge is difficult. There is little focus on these management teams and the companies that I have looked at and evaluated on top-line revenue or trying to find more ways to provide value out of the wood.
For example, when the Thurso project was brought to me, we looked at it from dissolving the pulp side and looking at the assets only. The previous owners and the previous management team had put together a business plan. Their business plan was to make the old product, northern bleached hardwood kraft, NBHK. Their business plan — this great, supposedly positive document to try to interest investors — had them losing about $8 million a year making their core product. However, they would have a cogeneration facility, and, because of government subsidies and the green energy side of things, that subsidy and that expensive energy would more than offset the loss of the core product. I viewed that approach as a fundamental flaw in the business plan. Why not solve the core problem first? Cogeneration can then be the ancillary product.
With that, we acquired our Thurso project. We started discussions only in December. To give you some insight into the project or the acquisition, we were interested in the assets and the assets only — that is, the pipes, the valves, and the digesters. This plant is basically a chemical plant or a bio-refinery plant, but they were operating it as an NBHK mill, and everyone else was looking at it as one of those mills. It is called a Kraft batch sulphate mill. If anyone were to build a pulp mill in the last 30 years, they would go to a continuous digester, which is a low-cost producer. All these pulp mills shutting down are Kraft batch sulphate mills — that is, the high-cost producers who are relatively small on a global scale.
These assets we were able to acquire and secure for $1.2 million. A lot of people thought we were crazy and probably spent too much. However, their replaceable insurance cost is $851 million. These assets are more than 95 per cent ideally suited for our new product, dissolving pulp. As we turn this project around and convert to dissolving pulp, we are able to take these $1.2 million assets that were heavily underutilized by the previous owner, and, once we are fully converted to dissolving pulp, even at the initial stages, given the current or spot price of dissolving pulp, the mill will generate just over $200 million in profit.
If we look at the Thurso project and what we will produce there, this concept is a bio-refinery producing multiple chemical products and co-products from biomass feedstock. This concept is gaining acceptance worldwide. It offers possibilities for creating new value chains and diversifying the forestry sector. The concept is analogous to today's petrochemical refineries, where multiple products are produced from a single raw material.
Canada has a well-established forestry industry with many years of experience in production, collection and transportation of wood to the primary user. Traditionally, these primary users were sawmills, pulp mills and paper mills. At our Thurso mill, the final product will be dissolved pulp. This product is mainly the cellulose component of the wood. The other major components of the tree are hemicellulose and lignins. These components currently are burnt with our recovery boiler and will be part of our cogeneration. Burning these fractions provides energy and recovers chemicals used in the cooking process. This cycle is called the chemical recovery cycle and makes the pulping cycle economical.
With the previous product, NBHK, being sold to the paper mills, which is what we are currently producing as we turn the mill back on and go through the transformation, we utilize about 50 per cent of the tree. We are in a good commodity cycle for pulp now. We sell it at $900 per tonne. When we convert over to dissolving pulp, we need only to utilize less than 40 per cent of the tree. Again, the product is much more specialized and refined. The current spot price is $1,700 a tonne.
When this mill was making pulp for the paper industry, it typically lost money about 80 per cent of the time. As we are making dissolving pulp for the textile industry, we will start in the rayon sector and viscose industry. This change will transpire over the next 12 months. This industry is growing typically at about 10 per cent. The rayon and viscose that we will make has more than double the absorbency of cotton, and has more breathability than cotton.
A large chunk of the population in India and China are moving into middle-income status. The first thing they buy is a cell phone, and then they improve their wardrobe. In these hot regions like India and Indonesia, they want fabrics that breathe better and are more absorbent. The industry is growing at about 10 per cent per year. We will no longer be relying on the structural decline taking place in the paper industry.
The other major product that will come out of our particular process is hemicellulose, which is a collective term for several types of sugars. We plan to have a second phase, once we complete the conversion to dissolving pulp and cogeneration, to go into bio-refining where we can extract even more value out of the remaining wood.
Some of the products, like Xylan, can be broken down to Xylose, which is used as a sugar substitute. It has half the calories of sugar, is safe for diabetes, and has been shown to have significant dental benefits. We have a dozen products that are high on our priority list to convert out of these hemicelluloses. This particular product is used for other industries beyond that use. The dissolving pulp or viscose itself can be used to make tire cords and absorbency types of products.
Another aspect that comes out of the breakdown that we go through in converting to dissolving pulp is the furfurals. They are considerably higher energy density in the hardwood source we will use than those from ethanol. Typically, the furfurals and ethanol are from sugar cane, corn, and cereal by-products.
Another product that we will be able to generate as we go to that second stage of more refining and turn this mill into a bio-refinery are acetates. Even higher value, they are typically used in cigarette filters. As the chief executive officer of a publicly traded company, while there can be negativity around trying to grow in the tobacco industry, I do not have the luxury of making those types of ethical or moral decisions. My role is to look out for the best interests of shareholders. Some of them are fine with being involved in the tobacco industry, et cetera. As long as we meet all the standards and regulations, my role and obligation is to go out and try to maximize profit for those shareholders.
This particular industry of cigarette filters is growing between 10 per cent and 12 per cent per year, especially in the Chinese market. Again, as people move toward middle-income status, they smoke more. Regarding the cigarette itself, if we look at the per-inch cost of tobacco compared to the acetate or the filter, the filter is cheaper. The industry over there is driving the growth of these filters and growing that product. Using acetates adds an additional 10 per cent profit over and above the standard dissolving pulp used for viscose.
We can discuss several other products during the question period if you wish.
The other major product that results is lignins. This is often described as the glue that binds wood fibres together. Lignin is one of the most abundant renewable raw materials available on earth. Despite its unique characteristics as a natural product with multiple chemical properties, it is largely underexploited because of its image as low quality and low added-value material. Research is ongoing on purification and alternative uses. However, in its current standing, it is commonly recognized that anything can be made from lignin, except money.
That concludes my presentation.
Senator Robichaud: Are you not making any money from lignin?
Mr. Wasilenkoff: Not at this point; we will burn it at the end of the process.
The Chair: Thank you, witnesses.
Senator Mercer: This is fascinating. Mr. Wasilenkoff, I was unsure where you were heading, but you have taken us down an interesting road of what the new forest industry will look like, or should look like.
In your efforts to retool your portion of the industry, what have those efforts meant for job retention or job creation? I assume a fair amount of retraining is required because you are trying new and different things with wood. In the same vein, what reaction have you had from the unions you inherited as you purchased companies with existing union contracts?
Mr. Wasilenkoff: If you like, I can also discuss our European operation later.
Focusing on the Thurso mill in Quebec, we have returned 300 people to work — as of yesterday, I believe it was 295. Our intention is to increase staff to around 310 or 315 people working directly at the mill. A study by government indicated that the indirect job creation from restarting that mill was 2,900 additional jobs.
We went through five or six different sets of negotiations with the unions. We put everything on the table; we were open and transparent. We view the unions as a critical piece in this transformation.
As you mentioned, there will be a lot of training needed and a learning curve to go through. We brought in several new senior-level managers with dissolving pulp and transformation experience of this nature. I am not a paper, pulp, gold or uranium expert; therefore, I always bring in an industry-specific partner. I am comfortable in saying I overpay this partner, but I must have complete and implicit trust in this individual.
It is a great time to grow businesses in the forestry sector. Employees are typically working for companies buried in debt with stagnant operations, which is not necessarily a bright future. That situation compares with joining our company, which is publicly traded. We are well capitalized. We had a record third quarter followed by a record fourth quarter. Again, most of the forestry sector is buried and going through difficult times, so we can encourage individuals to move to our company.
Senator Mercer: You made reference several times to dissolving pulp.
Mr. Wasilenkoff: Correct.
Senator Mercer: Can you explain that term to those of us who are luddites?
Mr. Wasilenkoff: We take whole logs and chip them. The chips undergo chemical processes in digestors or batch systems taking anywhere from one to three or four hours. At the end of the process, we have northern bleached hardwood kraft, NBHK, or the pulp used for the paper mills. This pulp is cellulose and hemicellulose — the sugars. When making NBHK pulp, we try to retain as much hemicellulose tonnage or bulk as possible since we sell on a per-tonne basis.
In our transformation, we will make that pulp throughout the cycle. At the same time, we will build a new set of digestors. Over the course of a couple of weeks, we will attach a pipe to the end of this new set of digestor tanks and valves. The pulp goes through another chemical process to extract the cellulose from the hemicellulose to turn the dissolving pulp into 100 per cent pure cellulose.
Our customers are the viscose makers, typically in India and China. They take that product through more chemical processes, which basically dissolve it. It turns into a honey-like substance of pure cellulose. They run it through a spinneret — like a shower head — creating long fibres in any shape, length or size. They change the recipe for any characteristics you want. The fibres are cut to a perfect length where they go to the spinning mills to be woven into viscose textiles. Viscose is found in items like suit linings, scarves and women's blouses. The industry is growing at a rate of about 10 per cent.
Viscose is a significantly better product than cotton. Cotton is going through a significant decline currently. Prices are escalating quickly because cotton production is one of the world's largest users of herbicides, pesticides and fertilizers.
On our website, one of our presentations shows how the cotton yield per hectare is double in China compared to everywhere else. China is not the best place in the world when compared to Brazil to grow anything. China is incredibly aggressive in its use of herbicides, pesticides and fertilizers, which is not sustainable in the long term. China is going through its own environmental issues and birth defects.
At some point, China will have to curb those efforts, in which case global cotton production will decline. It has been in a four-year decline already, which means less production and the price will increase.
The other option is to replace cotton with something like viscose. We manufacture the product at less than $600 per tonne. We feel those numbers are conservative. We sell our product at $1,700 per tonne. The current price for cotton linter pulp, which is our competition, is $1,200 per tonne. Again, we make our product at $600 per tonne and we cannot see the price going below $1,200 in the long term.
Senator Mercer: That is fascinating.
Ms. Kiraly, you talked about heating value when making reference to boiler standards, et cetera. You indicated that Canada uses the higher heating value and European standards use the lower heating value. Perhaps Senator Plett is the only one at the table who understands that difference because he was in the business.
What is this measurement and what is the difference between the higher and lower heating values?
Ms. Kiraly: I am not an expert on that information; I will have to get back to you.
Senator Plett: I will answer that later.
Senator Mercer: Thank you; I knew you would.
Senator Plett: It relates to input versus output.
Senator Mercer: You said that CSA believes the federal government should make it a practice going forward to mandate the use of CSA standards in support of future legislation to ensure diverse viewpoints of Canadians are represented, et cetera. You also said this discussion should be left for another date.
Indeed, it probably should. I will raise the question while you are here. Are you certain that an organization with as long a history as the CSA wants the government involved? The CSA brand is, without question, one of the most respected brands in the country. The CSA stamp means that certain things have been done.
Ms. Kiraly: I will answer in two ways.
There are two aspects to CSA. First is the development of standards. Those standards support the introduction of new technologies, products and processes. Second, the aspect to which you refer, is the CSA mark on the product. That mark on a product means a product meets a standard. It can be a CSA standard or an international standard.
When I refer to the idea that government should reference standards, standards are an effective way to bring rules and requirements that support government policy and initiatives, as well as industry initiatives.
What typically happens is that a jurisdiction might create its own separate rules and requirements. This process is expensive and takes time. It may introduce rules that prohibit products from entering the market; that are counter to other jurisdictions; and that limit distribution of products unique to the Canadian marketplace.
We strongly encourage government not to create the rules but to allow our consensus process to develop standards that support the policy and the initiatives of government and allow our standards to bring together the rules and requirements to support that policy and introduce products and services from a safe or sustainable point of view.
Senator Mercer: Mr. Crawford, in reviewing your presentation, I noticed a reference to micro-pulp mill fibres. Am I correct in assuming that you and Mr. Wasilenkoff are talking about the same or similar things?
Mr. Crawford: The process is different than the one Mr. Wasilenkoff is talking about. We can take pulp-mill fibres from existing mills and process them so they are at the micro-level. We can make them very small. Making them at the microlevel gives a unique performance to those fibres. Right now, we are making door panels using these microfibres. We put these microfibres in a polypropylene, which is a plastic, and that process reduces the cost of that material to the auto parts company and doubles the performance of the plastic. We can use that technology with existing mills now.
Mr. Wasilenkoff talked about viscose rayon. We can use that product in auto sector insulation. He talked about turning the hemicellulose into chemicals, and we can use that in nylon, and nylon has applications in the motor area. He talked about lignin, and we are working right now with FP Innovations to purify that lignin. We send it to Oak Ridge National Laboratory in the U.S., and they can turn it into carbon fibre. We want to bring that carbon fibre back to Magna and the National Research Council to put it into plastics. This fibre produces super lightweight, strong materials that can replace metals.
Whether we are talking about microfibres coming from existing mills or materials coming from these new mills that Mr. Wasilenkoff is talking about, there are endless opportunities to put this technology into automotive and other manufacturing sectors.
Senator Plett: I congratulate our clerk for bringing three wonderful witnesses to the table. We have heard three great presentations, and nobody has asked us for any money, nobody is telling me that burning coal is healthier than burning wood, and so I am having a great morning here. Unfortunately, I have to go to the Standing Senate Committee on Social Affairs, Science and Technology after this. That will bring me back down.
What a unique concept: buy low, sell high. It has been here for a million years, and we have someone who tells us it is working. I congratulate you for that, sir. You talked about mills closing because of outdated equipment. You had all the technical terms, and I will not try to repeat those terms. The mills that were closing, the mills you purchased, were they closing because of lack of business, or because the inefficient operation did not allow them to make money anymore and you were more innovative than the previous owners and turned these mills into money-making operations?
Mr. Wasilenkoff: I would describe the product mix as the challenge when I was evaluating companies. Before buying my first paper mill, as an example, I looked at a mill in Germany. It was manufacturing commodity photocopy paper and a few other things. It was losing about a million euros a month. We went through the analysis to see if there was an opportunity. The purchase price was $1, so we had nowhere to negotiate on that side. We had to see if we could turn it around. We evaluated that consumers could buy the same paper from Indonesia, shrink-wrapped in bundles of 500 sheets, with their own logo on it, shipped to Rotterdam harbour, for less than the price this German company was buying pulp for. There was no competitive advantage. It never had a chance, no matter who we put in there or what we tried to do. The only way to make it work would be to shift it completely into a new product.
As an example, I bought a mill in Dresden, Germany. It was manufacturing wallpaper. They had good inroads and a strong, deep understanding of the wallpaper industry, the sales cycle and the customers, but they were making a standardized simplex paper, which is not that dissimilar to photocopy paper. It was for a different use, but any paper machine in the world could make it. Through research and development, we developed a non-woven type of product. We intermixed more than 20 per cent synthetic fibres with the paper. We make two sheets of paper at once. The top sheet has ideal print characteristics, and the bottom sheet has ideal strength and other characteristics, so now the wallpaper is dry strippable. People do not have to tear it off in 200 or 300 little pulls or steam it off the wall. Once they loosen a corner, it comes off in one pull. We felt this was the challenge in the wallpaper industry. Whenever people were making the decision to buy it, they said, I am not going to put it up because I never want to have to take it off the wall.
With that, if we look at the wallpaper industry globally, it is still in a 1 per cent or 2 per cent decline. Most people say it is not a great area for investment. Within that industry, though, this non-woven product is taking off and displacing the old product. We are growing at between 15 per cent and 20 per cent per year. Since acquiring the mill, I have made three upgrades. We have more than doubled the capacity. We now represent 55 per cent of the global production of this non-woven wallpaper, and we command 20 per cent profit margins. With the old product, we would lose about 1 per cent, no matter how efficient we made it. It was the wrong product mix.
The other mill I bought is in Switzerland and is called the Landqart mill. We have two paper machines here. One is a similar machine to what we would find here in Canada. It produces about 20,000 tonnes and makes commodity papers. No matter what we do, we lose about $2 million a year on that machine. We also have a banknote machine, a totally different type of technology, where we make banknotes and other high security papers. We are the sole maker of the Swiss franc. We make the euro for ten countries. We make passports and things like that. This other machine, making about 20,000 tonnes, is losing $2 million a year. It should be losing $4 million or $5 million a year, but we are able to make visa stickers for India and China et cetera that help bring the margins up.
We are doing a transformation of that machine, a $50 million rebuild that will be done in about four or five months. It will quadruple the size of our banknote capacity. Banknotes are growing 5 per cent to 7 per cent globally. If we look at photocopy paper, newsprint, magazines, in today's pulp market, the pulp price is more than 100 per cent of the cost of their paper, but they are trying to keep the machine alive for a while. Again, how do we make a go of it when pulp is $600, $700 or $800 and the finished product is $800, $900 or even $1,000? There is not enough long-term, sustainable margin. We sell banknotes at $45,000 a tonne. You can imagine that, on that product, there is a little bit of profit margin available.
Senator Plett: Ms. Kiraly, you spoke about CSA standards. I have been somewhat involved in working with boilers, as Senator Mercer has already suggested. We had witnesses tell us that, in Europe, many boilers were built that were much more efficient and could do a much better job than ours, but they were having problems with CSA standards. I know that in Canada, there are many small operators. Hutterite colonies are known for being innovative and entering into different lines of work, and many of them in Manitoba build boilers. Can you explain the process of obtaining a CSA sticker for either a boiler that has been brought in from out of country or someone building their own boiler here and obtaining CSA approval?
Ms. Kiraly: Of course; to obtain a sticker on a product or a CSA label, a manufacturer must demonstrate that they comply with the appropriate requirements.
The first thing you have to know is, will that European product comply with the Canadian requirements for boilers? That question is key. If the provinces say a boiler has to perform in a certain manner, it is contingent on the manufacturer — whether it is a small Hutterite community or a large European manufacturer — to understand what the government requires. In this case, the provinces primarily have the jurisdiction here. What do they say in terms of installation, materials, construction, design and safety? The first place to start in this area is the legislation. That is based on our CSA standard.
A manufacturer needs to ensure that the product design meets those requirements. Then they bring forward the product and apply to CSA. We test it and verify that the product performs in alignment with the standard. When it does that, CSA allows manufacturers to put a mark on their product; and we will go into a factory about four times a year to ensure that the manufacturer continues to build the product in the same manner that the original design was submitted to us, so that it continues to perform. It is literally application, test and then follow-up service.
CSA has testing facilities around the world. That is one thing people may not know about us. We have operations in the U.S. and in Europe. We even have a lab now in Guangzhou, China, so that wherever a manufacturer is located, they can apply locally to have a product tested and understand what the Canadian requirements are before they need to ship. There is an effective and efficient process.
The other thing we do is qualify testing organizations. Let us say a manufacturer in Europe is already working with a European test agent. If that test agency has been accredited appropriately, we can take the test data they already have, review it and look at the deviations that may be required for the Canadian marketplace.
The process of standards and product testing is designed not only to protect the consumer from a safety point of view, but also to facilitate trade. We try to bring the standards closer together and make the testing process accessible, convenient and useful to manufacturers. A European manufacturer needs to conduct research, but the manufacturer can apply in Europe to be approved for the North American market.
Senator Plett: If I want to build a boiler in Manitoba, do I go to the Department of Labour and Immigration in Manitoba and obtain their approval first, or do I obtain your approval first?
Ms. Kiraly: You go to Manitoba and understand what they require in that jurisdiction. Manitoba will take a CSA standard reference in legislation. You need to know what they require for where you are building the boiler. Then you come to CSA, once you understand what regulations are in place, and apply to CSA.
Senator Plett: Mr. Crawford, I never realized that the auto industry can benefit also from the forestry sector, and it is great to understand that. My question is simple, although it may be off-track: Are cars safer now than they were 30 or 40 years ago?
I used to have a 1956 Ford that I rolled into the ditch. There were seven people in it and we all walked away from it. The one person that was hurt was the one that decided to get out of the car while it was rolling. The car rolled over him and he was hurt, but the rest of us all walked away and the car did not even look that bad when we were done. With today's plastic models, I am not sure if they would have looked the same way.
Mr. Crawford: I think cars are safer now. We have airbags; we have anti-lock brakes; we have all kinds of high-tech equipment to protect the passengers.
I will loop back again to the theme of forestry. All kinds of things are taking place in the forest sector now, with FP Innovations and with our nanotechnology labs across the country, where we can create high-performance fibres from forestry to put into cars to increase passenger safety.
I mentioned carbon fibre. These are high-tech fibres that the aircraft industry is using, Boeing, to replace metal with carbon fibre in plastics. We cannot use these carbon fibres in the auto sector because they are too expensive. However, we are working on technologies now from lignin, where we can bring carbon fibre prices down so we can mass-produce them in the auto sector.
You have all seen Formula One races, where they use carbon fibres in the plastics; they crash the car at 160 miles an hour and the driver walks out unscathed. We will be able to make those fibres you see in the Formula One race cars out of lignin. We will be able to put them in cars you and I can afford and they will significantly increase the strength of the car — stronger than steel.
Senator Robichaud: Mr. Crawford, I do not think these new plastics will add anything to the strength of the car. Senator Plett rolled a car over and everyone walked away safely. Is that anything new?
You mentioned that whatever was being researched and whatever new product was created had to be taken to the end where it can be used. Are you satisfied, with that research, that there is enough effort put into it to bring it to that level?
Mr. Crawford: The universities look at some of these performance issues; they look at two or three different measures of performance. However, in the real world of how we build an auto part that goes into a car, there are not three tests, there are more like 20 tests. They are detailed and sophisticated.
The parts companies themselves have to perform the tests. They are often replicated by the Fords and GMs of this world. The testing process is extremely sophisticated that the auto companies use to ensure the durability, quality and safety of the parts that go into a car. This area is big; it is expensive and time consuming.
The council created a fund, with the help of the Ontario government, to share the cost with some of the parts companies of performing these expensive tests to bring in these new materials. That fund has been helpful in accelerating the movement of these new forest products — and agriculture, too — to move them into the automotive sector.
The government is strapped for money, with lots of deficits and this kind of thing. However, our thinking is that the government can spend small amounts of money in this area and have huge benefits. It is all about accelerating the testing of these products and moving them as quickly as we can into a car so that we can put people back to work in the forest sector.
Senator Robichaud: Ms. Kiraly, when you said CSA was looking for safety, you mentioned health and emissions. We had a witness last week who did not convince Senator Plett, but I listened to what he was saying, which was that burning wood is worse for emissions than burning coal. Does CSA look at emissions to see how comparable they are to other sources of fuel?
Ms. Kiraly: Typically, our approach would not be to say that one is better or worse than the other. We look at the impact and ascertain what the emissions are. The situation is difficult to assess on the output only. People are looking at the life cycle. We look at the whole life cycle and establish a standardized method for assessing it so that you can decide, using a standardized process, if wood or coal is better. We do not say absolutely coal or absolutely wood. We give you a standardized process that defines a test procedure and defines how to measure and assess impact. You put products through that process and come up with the values.
We talked about why CSA would work with standards. As a government, you would want to have a policy stating what maximum emissions should be, but you may not want to specify coal versus wood. That would allow industry to meet your policy of "no more emission than X," and you would have a standardized process that would allow you the confidence to know that your policy was being fulfilled.
We do not go to the wood industry and make a comparison, but we give them the tools to support your emissions standards.
Senator Robichaud: Then we will know the emissions of one kind of fuel versus another.
Ms. Kiraly: That is right, and you will look at that not only from the heating value, but also from what it will take to harvest. You look at the life cycle of a process. That is where we become involved. We set rules and requirements that will help ascertain safety and sustainability.
It is important, when we talk about the role of standards, to say that the role is to support legislation. We do that from a health and safety point of view. The important thing about standards is that they continue to change. Legislation can be fixed, but standards can change to introduce new technology and allow new products to be introduced.
The commercialization question that you asked earlier is important because often a lot of research is being done that the government is funding, but the commercialization must be supported by changes in legislation and changes in standards. The government has a regulatory policy and framework that also must be able to move quickly so that when people introduce new products they know what they are up against. If there is legislation that prohibits biomass boilers, it does not matter whether CSA approves it. We need to have research, legislation and standards in place to support the redevelopment of industry and to enhance our competitiveness.
Senator Robichaud: Mr. Wasilenkoff, you seem to be successful in whatever challenge you take on. You have to use new technology in what you are doing, because obviously you are not doing what the old mills were doing. Do you conduct your own research, or are you associated with a university or the National Research Council?
Mr. Wasilenkoff: Each opportunity is different, and there are multiple levels of research. Some of it is external, such as dissolving pulp. We are not reinventing the wheel. This process is used in several places in the world. A brand new dissolving pulp mill was built about two and a half years ago in Brazil. That mill was one of the catalysts that drove me to looking at dissolving pulp. They could have chosen any technology in the world. They obviously wanted to build the most effective at the lowest cost. They built a kraft batch sulfate mill. As I said earlier, all the mills that have closed in the last 30 or 40 years are those types of mills. They built a much larger one than ours — we will be about 60 per cent of their size — but they spent $1.2 billion. I was not Canadian-focused; I scoured the planet. I looked for the largest, most efficient and most ideally suited. Dissolving pulp uses different chemical processes, and we wanted stainless steel line and feedlot-woodlot segregation so that we could get the recipe better by putting the different wood piles in place. Many pulp mills do not have that segregation.
Again, I scoured the planet for the most ideally suited asset at the best price. Unfortunately, it was in Canada; that is, they had the best assets and were the most underutilized, therefore they drove it into the ground.
The second part of the research is internal. On our banknote side, we have a large research and development team that has evaluated the market. We have committed $14 million to a new product. We will bond two thin sheets of banknotes with a polymer layer in the middle. The finished product has more than double the durability of a banknote but has the same feel as a cotton banknote so one cannot tell the difference. We have transparent windows that add significantly more security. We can pick a number out of the air for what we will charge. We decided to charge double. Because of the double durability, it is significantly more cost-effective for the banks.
A Canadian banknote costs about 8.6 cents for the whole banknote, printed, of which the substrate is about 30 per cent. We have increased the cost by 30 per cent, making it 1.3 times the previous cost, but we have doubled the longevity of the banknote. It is cost effective for them and, as I said, we made up the price. We decided to charge double because that is what we think the market can bear. There are good margins in those types of businesses.
The non-woven wallpaper was generated internally. A couple of other players are making it as well. We were not the first, but followed the lead of someone else. They spent their time, money and effort. We latched on to it quickly and we do a much better and more efficient job of it.
We find the opportunity and then pursue it aggressively. We try to move fast and be the best. Once we have market share and a reputation, it is difficult for someone to break into that market.
Again, in the Canadian and European forestry sectors I found a huge reluctance to change. Changing products to make something totally different for a totally different industry is too high risk and unfathomable for many people. I am not tied to any particular industry. For me, it is only a widget to make the best use of the assets.
Senator Robichaud: Previous witnesses from the forest industry told us that they had a hard time keeping young minds that could make the industry move forward because they did not see much of a future in the industry and they were moving to other industries. That is the case, is it not?
Mr. Wasilenkoff: Absolutely; I read the document you put together on the past, present and future. One of your proposals that caught my attention was to try to grow and promote the biomass and biofuels industry for heating and electricity. Look at the innovation and growth that has occurred in the computer industry in the last 20 years. Exciting things happen in leaps and bounds annually, which attracts young people. In contrast, in the forestry sector, when creating heat and electricity from biofuels, we are basically only burning wood in one form or another. After 300 years of Canadian forestry and billions of dollars spent through profits and government subsidies, our great light-bulb idea is to burn the wood? The caveman came up with that.
Senator Robichaud: I get the point. Thank you.
Senator Ogilvie: I, too, want to acknowledge that this has been a refreshing morning looking to the future exactly as you have described. It has been wonderful to have these inputs.
I want to make a quick observation, Ms. Kiraly, with regard to CSA. CSA is one of the great Canadian achievements. During my scientific career, we based every decision on equipment that had to have the CSA sticker. I made a mistake recently in purchasing a system for my domestic use from a supplier. I assumed that it would be CSA-approved. It was a propane-based system that I had to assemble. At one critical juncture in the propane flow, there was a loose-fitting connection. At that point, I returned it and then looked for the CSA sticker, which was not there. This item was from one of the countries in which you mentioned that you now have a facility. My kudos to CSA and to the role that they play for us in Canada.
I want to come directly to the forest industry aspects. Again, I am absolutely delighted with the innovative and forward-looking approaches that you are taking. You are a successful business person, looking at it in terms of the value-added products that come from the source. I will not ask you a question, Mr. Wasilenkoff, because I understand your model. You are dealing with an existing operation that has access to a certain amount of existing biomass and it has a 20- to 40-year growth cycle. At the end of your discussion, you were also moving towards the more micro end of cellulose. We are looking at carbohydrates in different polymeric forms. The link between lignin and cellulose is the way that they are linked together to give different bulk properties.
Mr. Crawford, your sheet shows you moving through the cellulose polymer back down close to monomers and derivatives of monomers. I am delighted with the way that you both have been able to use the existing forest biomass in these innovative areas. If you were looking at the kind of capital that Mr. Wasilenkoff said is required to adapt an existing facility — and, if you are entering the industry today and you saw value-added products from carbohydrates and small cellulosic polymers even for jet engine fuel to specialty chemicals — how do you see the forestry by-product area competing with products emerging in terms of the rapidly growing biomass: that is, the fast growing small bushes to grasses and what we are beginning to see in terms of the use of algae and some bacteria as mass producers of cellulose-like or small carbohydrate polymers. Do you see us being able to compete long term from the forest biomass as we reach that chemical line and these areas?
Mr. Crawford: I think there are great opportunities to compete. When we get into things like grasses and agricultural residues, we run into the problem of the collection and storage of that material. People are working on the technology to do that. However, it will be a challenging technical issue to overcome, because it is like shipping air. The great thing about forestry is that we have 100 years of experience collecting all this wood and it is dense. We will be able to compete on the collection side.
We are dealing with a whole lot of companies now that want to invest in chemical production in the North. Every one of them will identify that as strength for forestry. It is the collection system, all the technology and all the big machinery that we have developed over all these decades to be able to pull the wood out of the forest and to be able to store it that is impressive. Mr. Wasilenkoff talked about digesters. All we need at the front end, namely, the biomass collection, is all in place. We do a superb job of collecting that wood. That is a huge advantage for forestry over grasses. However, some of the technology that we are looking at for the forestry industry, namely the technology for the conversion of the biomass into the chemicals, works better with hardwoods and softwoods than it does with grasses. We see a great future for forestry.
With regard to the competition with Brazil, as Mr. Wasilenkoff said, we must be fast off the mark and we must be aggressive. We need to find these emerging companies that have the technology to produce chemicals from the forestry industry. We need to find these people, partner with them, support them and be aggressive about it.
Some companies we are dealing with are from the U.S. They are saying that they are having a hard time. There are a million layers of bureaucracy in dealing with the United States. The U.S. has lots of money and they are 10 times bigger than Canada, but they are hard to deal with. We are told: you guys in Canada are smaller; you talk to each other, and you are organized and networked; from a business relationship, it is easier to work with you guys.
These are intangibles. I like the way Mr. Wasilenkoff does it. He is aggressive and goes for the jugular. That is how we need to work in the auto sector, forestry and government. People need to work as a team and row together. If we are to be aggressive about this industry, then we need to move quickly and grab these business opportunities. Who cares where the technology came from, be it the United States or Europe. Find the technology, bring it over here and drive it into Canada. We can compete here. Mr. Wasilenkoff is proving it. We can do this.
Mr. Wasilenkoff: On biodiesels, biofuels and algae, I have spent some time and underaken some research on my own looking at those industries. With algae, we can have a closed-loop cycle that can be efficient. It is probably a great place to spend more research and development money. It has long-term viability, but it does not solve the forestry sector problem and what to do with these trees. A closed-loop system does not employ a lot of people, either, which is probably not one of your mandates. Looking at biodiesels and biofuels, there is a growth spurt in the U.S. in converting corn and making ethanol. When we run the numbers, without the government subsidy, it is absolutely a negative return. I looked at it about a year and a half or two years ago, and it was about 0.8, if I remember right. If we look at palm oil, while we do not to grow it here in Canada, it has about a 5-to-1 return. If we go one step further, there is a product called Jatropha, which grows in arid regions. They do not have to give it water for three years. It can grow on top of rocks. They are not competing for good, high-quality agricultural land like corn in the United States. I cannot remember the number, but it is 10-to-1 or 11-to-1 compared to a negative on ethanol. If we want to promote biodiesel and a bio-refinery here, we are putting a band-aid on it. We are only trying to do something because we happen to have these trees. However, it is not the best thing to do and it is not competitive. As biodiesel takes off, I think it will be a huge industry. It is being blended in Europe. It helps diesel engines and it lasts longer for motors. Jatropha will wipe out biodiesel, however. It is not sustainable long term; it will require government subsidy. We will then be here talking about how to solve the biodiesel industry in a decade or so.
Senator Mahovlich: I thank the witnesses for appearing. I am happy to hear you bought the mill in Thurso. Many great hockey players came from there. My friend Guy Lafleur is from the area.
You mentioned filters for smoking. I was in Costco the other day and wondered if smoking is increasing in Canada. I went to Costco for propane, but there were 10 or 15 people in front of me in the line and I had to wait for about 20 minutes while people bought large quantities of cigarettes. It makes me think smoking must be increasing.
Mr. Wasilenkoff: Smoking is on the decline in North America and Europe because of the bans in public places. It is no longer convenient to be eight metres from a door, et cetera. They are at the next door by then, so there is really nowhere to smoke anymore.
Senator Mahovlich: You mentioned rayon. My wife always tells me when I purchase a golf shirt to ensure it is 100 per cent cotton. You say it is much cooler with rayon in the content.
Mr. Wasilenkoff: Yes; significant advancements have been made over the last decade or so in the rayon industry.
Education is required because rayon required dry cleaning a decade ago. The fibres were not strong and they broke down. However, manufacturers have perfected the recipes. There is now high modulus rayon and a variety of sub-sectors within rayon and viscose. A woman's blouse, lingerie or scarf has a different touch and feel, such that one would not know it is not cotton. It has all the same characteristics, but better in most aspects.
Senator Mahovlich: Is your non-woven wallpaper available in Canada?
Mr. Wasilenkoff: No, we sell nothing in North America. The wallpaper industry in North America is slow and behind the times, so to speak. There is a lot of negative investor sentiment because of a couple of failed wallpaper companies. They have no money to expand or grow their business.
However, in Europe, the sector is growing predominantly. The latest and greatest technology and expansion is in Europe. The most modernized wallpaper printing facilities are in Russia and the Ukraine.
We are looking to expand into the region because of the 20 per cent tariffs imposed. We can still make money after the 20 per cent markup, but if we operate within their borders, we think we can make a 20-per-cent margin plus saving the 20 per cent tariff.
Senator Mahovlich: Previous witnesses talked about biomass. They said all waste from the forest should not be removed because the waste fertilizes the future of our forests. When I fertilize my garden, I walk up the street to my local garden shop and buy a bag of fertilizer.
Is it possible for the forest sector to clear all that waste biomass from the forest and then fertilize the forest with fertilizer? Has that scientific approach been studied?
Mr. Crawford: This is not an area in which I have any expertise. We hear similar comments about removing agricultural residue from the land. In that area, studies have identified the amount of agricultural residue we can remove from the land without negatively impacting soil nutrients. I imagine there must be something similar in forestry. There may be requirements to leave some of the residue behind to fertilize the forest and a portion that can be removed sustainably. I am sure scientists in the forest sector will be able to answer that question.
Mr. Wasilenkoff: I am obviously not an expert in that particular field, but I can comment as a pulp-mill producer. We have an economical collective zone of 200 kilometres to 300 kilometres. Beyond that zone, it is no longer viable with the transportation costs, increasing price of oil and things like that.
It is difficult in Canada to secure the fibre source. Growth rates in Brazil allow trees to generate or regenerate after eight years. In the colder climates, generation and regeneration take 20 or 30 years. We could spend more money on silviculture to perfect growth rates or the genetics of trees.
I recently visited a multi-billion dollar forestry company in South Africa. I have never seen a technology or research centre like they have. It was all about silviculture; perfecting fibre and increasing growth rates, et cetera.
Again, my view is always, let us not waste money or spend it again. There could be an initiative to partner or enter a joint venture with them. Why try to reinvent the wheel. It has already been done in South Africa.
Senator Mahovlich: Is Canada's labour force ready and qualified for jobs in the bio-economy?
Mr. Wasilenkoff: Yes, in my opinion, it is probably the only viable solution. Canada cannot compete with Third World countries if we only pick up a bale of something, move it 20 feet and put it back down. We must focus on technology, innovation and adding value.
The labour force at the Thurso mill we bought is incredibly talented. They make some of the highest grade NBHK with tight tolerances for the photographic industry. That gave us a strong comfort that they can move into bio-refining and things like that because tolerances are tighter and the product mix is slightly different. With their training and expertise, they are used to making minute modifications to perfect products.
Senator Mahovlich: It was reported in the June 9, 2009 issue of Canadian Chemical News that Toyota Motor Corporation plans to replace 20 per cent of the plastics used in their automobiles with bio-plastics by 2015. Is this goal a realistic achievement, and will cars be more economical for the public?
Mr. Crawford: The car companies will not use more expensive materials. These bio-based plastics must be cost-competitive, or if they cost more, they must perform better. Using them must be cost-effective.
Everyone thinks of Toyota as the leader in this area. I think Ford Motor Company is the world leader, which operates here in North America. Many people in Ford Canada are involved in this area. Toyota may receive the credit, but Ford is the world leader, and they are leading in North America.
We signed a memo of understanding — a partnership — with the Mitsubishi Group in Japan. Many people know nothing about what Mitsubishi is doing, but they are the leader in Japan. There is no question that Mitsubishi is far advanced beyond Toyota.
Many automotive companies are becoming involved beyond Toyota. Many have gone further than Toyota. This trend is almost unstoppable because so many car companies are becoming involved.
As a result of the car companies' involvement, chemical companies and industrial bio-tech companies are pouring money into new materials. Seven multinational companies in Europe and the United States are coming into the market currently with bio-based nylon products.
Senator Mahovlich: That is a positive note for our forestry.
Mr. Crawford: It is. Currently, many of these materials come from agriculture. However, new technologies in the pipeline will switch to forestry. Some of these technologies improve performance. When we talk to the Japanese, the first thing they ask about is our forests: You have trees; how do I access that resource?
Senator Mercer talked about the micro-pulp mill fibre. We had delegations from Mitsubishi, a company that is interested in that technology. Mazda was here looking at this technology. They all want to know how these Japanese companies like Mitsubishi and Mazda can make a part using the micro-pulp mill fibre, how a Canadian parts company like Magna can make it, and how it can be assembled, even in the United States. Mazda is asking how to create a joint venture to move this technology into Japan. That 20 per cent by 2015 may be slightly optimistic, but the industry is trending in that direction.
Senator Eaton: I want to follow along Senator Mahovlich's questioning, having been to Guelph University and having seen some of the prototype auto parts in the labs. Are the auto companies themselves helping you? Are they putting money into developing these products? How do we commercialize the products and bring them to the next step where they are used?
Mr. Crawford: The larger Canadian auto parts companies are putting the money into development such as Magna. Everybody knows those folks. Woodbridge is a Canadian company with 60 factories around the world. Woodbridge makes the foam seating cushions. It is using soy oil to make the foam cushions. We are working with a company that can make the chemicals for the foam cushions out of forest biomass. Woodbridge is actively involved, and almost all of Ford's seating is bio-based now.
Senator Eaton: It is? They are in the cars?
Mr. Crawford: They are in the cars right now. In almost any new Ford that you ride in, you will be sitting on foam cushions made from soy-based chemicals.
Senator Eaton: My husband has a new Ford, and it is amazingly comfortable.
Mr. Crawford: We are only two or three years away from those foam cushions being made from forest biomass. Woodbridge, as we speak, is doing a lot of that lab work.
Senator Eaton: The product is still in the lab?
Mr. Crawford: It is still in the lab, but in two to three years, we will probably be sitting on cushions made from foam from forestry.
Senator Eaton: We still have three or four years before we step into a car, a percentage of which will be made from bio-forest products?
Mr. Crawford: Yes, but I will give you another example of what will go into cars in the next year or two. When someone purchases a sport utility vehicle, SUV, or a van, there is that flat section in the back that they put groceries and suitcases on. We have to find a way of making that flat section super light in order to have better fuel efficiency, so Magna is working on a new product now. It uses a honeycomb cardboard that Cascade makes. They take that honeycomb cardboard, and they have soy-based polyurethane on the top and bottom, and it is reinforced with fibres to give it high stiffness. That product is going into the new GM cars, as well as Honda's. We are working with Ford on how Ford can use it. Forest products are going into cars.
Senator Eaton: Between Mr. Wasilenkoff and you, how many years do you think it will be before the market takes over bio-forest products so you do not have to spend a lot of your money developing forest products? When will the market finally take over?
Mr. Crawford: Typically, when we introduce TVs, cellphones or whatever, these technologies go on for many years, a decade or two decades, and it is like nothing is happening. The product is not taking off. Then, it is like a hockey stick. It hits a point of inflection where it goes shooting up like that. That is called the point of inflection, when it shoots up. We are approaching that point now. People are working away in companies; people are working away in laboratories; people have been talking about it for a decade; and they cannot see any sign of change. We think we are only two or three years from where we will hit that point of inflection where we will see rapid things happening, and these bio-materials will see widespread use in the market.
Senator Eaton: Ms. Kiraly, are you already beginning to test certain bio-products for certain things, or will you wait until they are installed in cars or rolling off the assembly lines to test them?
Ms. Kiraly: Typically we do not become involved until there is a product prototype. We are there as the product is introduced. We are not there typically in the research and development phase. We are not testing biomass products.
Senator Eaton: Is that a good thing or a bad thing? I will tell you why I ask that question. We heard about building codes relating to building with wood — six-storey and seven-storey buildings using things like cross-laminated lumber — and we found it discouraging that builders had to force the building-code envelope all the time. It took builders years to build the first building in Quebec, and to obtain the permits for the skating oval. In other words, building codes are always behind instead of current with, or in front of, the industry. I was wondering whether you will hold up the use of certain bio-forest products because they have to be tested, or do they have to be tested?
Ms. Kiraly: Typically, we move as fast as the industry or government asks us to. I will give the example of nanotechnology, because that is something we are working on right now. The Government of Canada has invested probably close to $100 million in research for nanotechnology. CSA has been working internationally on helping to develop standards for the use of nanotechnology. Right now, we have only published standards that define terminology used for nanotechnology, because if we cannot define it, then we cannot measure it and we cannot use it.
We are there because the manufacturers have been saying to us, we want to use nanotechnology in our product development, so you need to help us put the standards in place.
We are there to support manufacturers, but we are not an organization that is in R&D, and doing it independently. We work hand-in-glove with industry and government. For that to happen, for CSA to start working, typically an industry association or a government department will say, CSA, we are looking at this product and how to introduce it; can you help us?
We start with the standard, and then ultimately in that standard there is a test process or some sort of values that have been established. Then our testing and certification arm will test the product. The standard is aligned to the research. We look for the best ways to test, measure and put a protocol in place that will allow that technology to be introduced.
[Translation]
Senator Rivard: My question is for Mr. Wasilenkoff. I am glad that the Thurso plant conversion is a success. First, I would like to know whether you could secure any assistance from the government for that, like a direct grant or loan guarantee.
[English]
Mr. Wasilenkoff: In terms of the overall project financing, we put in the first $30 million. We were able to secure a 10-year loan from the Province of Quebec, from Invest Quebec, for $102.4 million. The mill itself had a black liquor credit of about $9.8 million or $9.9 million that was already in existence, and it was part of the purchase agreement. We are in discussion right now with the green transformation fund. We have a cogeneration project. It is budgeted at $62 million; and according to the mandate or the outline of the fund, they can provide assistance of up to 25 per cent. Therefore, we are looking for approximately $15 million from that fund.
[Translation]
Senator Rivard: Several plants in Quebec closed down, including in Beaupré and Donnacona. Operations were suspended for long periods of time in La Baie and Jonquière. Could the success you talked about in Thurso be reiterated to save or transform these plants?
[English]
Mr. Wasilenkoff: In general, I would say that approximately 10 per cent, maybe 15 per cent at most, of the forestry companies that are going through challenging times can be saved. As I mentioned earlier, senators here today are left with a monumental task of trying to save the whole industry and retain jobs. I do not envy that task; unfortunately, I do not see a bright light at the end of that tunnel without significant subsidies.
The products we are talking about, or the auto sector, while these things are great, they will not be the same size of industry that we have today in Canada, at least in terms of job creation. Our intention is to sell much more product at a much higher price per tonne, but we do not need as much wood. It comes from wood as the product, so that means there will be less people harvesting, shipping the products and things like that.
[Translation]
Senator Rivard: You generate 25 megawatts of power. Approximately, what percentage of your needs does this represent in the operation of the Thurso plant?
[English]
Mr. Wasilenkoff: Our intention is to grow or build approximately a 21-to-22-megawatt facility, but we are looking at a facility as large as 25 megawatts. When we made public statements to the investment community, we wanted to ensure they knew the boundaries or parameters.
We will utilize only a few megawatts of that power. Our contract with Hydro Quebec is a 15-year contract; we will sell 18.8 megawatts per year back to Hydro Quebec. As a shareholder of the Thurso operation, we obviously like cogeneration. We think it is a great project. It will generate consistently between $14 million and $15 million per year in profit.
If I put on a different hat, as a Canadian taxpayer, I am not sure I agree with the potential strategy that allows us to buy dirty power for 4.4 cents and sell it back for 11.8 cents. If power is available at 4.4 cents, we should buy that power and utilize that power. If it is not, we should not be in projects that require that power, or in that area.
I am a capitalist at heart. I think if something is not making it without a government subsidy, then unfortunately it should not make it. It will need to find a new solution or new sources. Thank you for the subsidies though; I am not turning them down. I apologize for not asking for more money earlier.
[Translation]
Senator Rivard: So, it would be a generation or cogeneration project. If it is generation, only the biomass would be used, but if it is cogeneration, you have to use both biomass and something else, like natural gas, coal or some other substance.
[English]
Mr. Wasilenkoff: Initially, we will take the whole log; we extract it down through these processes and end up with a pure cellulose product, which is our dissolving pulp to sell. We will take our hemicellulose and our lignins, as well as bark, and put them through the process for burning and creating power.
The hemicellulose — these sugars that we talked about — is the next step in bio-refining. There is a lot of profitability available because we have a multiplier effect. The reason is that the bottleneck in our operation is this hemicellulose. We cannot burn it fast enough. The equipment on that cogeneration is not big enough to be able to utilize it.
We will produce approximately 575 tonnes of valuable dissolving pulp and we intend to produce it ourselves. However, if somebody had a plant next door that could take all that hemicellulose from us, we would be at 700 tonnes of production, and each tonne is $1,000 of profit margin to us.
Senator Fairbairn: I thank all three of you for coming. It is an interesting world that you are in. Many of us, including myself, do not understand it as well as we might.
Ms. Kiraly, in your speech, you noted that your organization is not a government body and your standards are voluntary until they are referenced by some kind of government organization. You particularly mentioned that you would be happy if the federal level of government could take a hand in this area in a sharper way than perhaps it has been doing.
Can you give us more of an idea of how you could go about this process? Is it something that needs to be done in the Parliament of Canada to bring together a special organization for this area? What other efforts do you have, or could you have, in the various parts of the Government of Canada in helping an important issue?
Ms. Kiraly: That question is near and dear to our heart. One thing that CSA does is work with industry and government. As I said in my paper, part of the credibility is that by the time we have a standard, it reflects those diverse viewpoints.
We want the government to use those standards to help support the economic and industrial strategy for this country; not to spend their time setting rules and regulations that a standard can take care of and that government and industry can develop on the side, but set the direction, talk to industry and set policy and legislation that will support that growth. Do not spend your time making the rules and dealing with the minutia. We can set standards, or look internationally and bring standards that enable a new forest product or biomass technology to be introduced faster.
Typically, government may not know that a standard exists. Government may not know about CSA standards at all, so they will spend time crafting legislation and then putting together their own standards and requirements that may not be cognizant of what is going on in the world, or may not reflect an industry viewpoint.
It is important for Canadians to compete. For us to introduce new products and technologies faster, we should use all of our tools. The Europeans do this very well, as do the Japanese. When they introduce a new technology, it is the result of government and industry saying, we want to be the leaders in "X" and what do we need? We need an education strategy to support that goal; we need a government subsidy or research at the early stage; and we need industry participation because we believe we can capture this market and be a world leader.
Standards support that effort. I respectfully say that Canadians can learn a little bit more from some of these other countries that are faster and more nimble, so that we have that dialogue and we can bring the expertise from the various parties to make that happen faster.
Standards are one piece of that strategy. We believe that if we worked in partnership together with government and industry and they referenced a standard, we could move much more quickly and we could be more dominant than we currently are in sectors that we chose.
Senator Fairbairn: Thank you very much. That is something we should keep an eye on.
Senator Robichaud: If I heard you correctly, Mr. Wasilenkoff, you said that if an activity cannot stand on its own but needs a subsidy, it should not happen. Would you say the same thing about research? At some point, research institutes must receive funding from government to help them move forward and keep ahead of the pack.
Mr. Wasilenkoff: There are two answers to that question. Not all R&D needs to be supported by government. The computer industry is a good example. The catalyst of that entire industry was government funding and defence spending, et cetera. Government spent a lot of money to kick-start the industry, but then it crossed that threshold and went into the private sector. Senator Eaton asked about that threshold and when it will happen.
At the baseline, where a lot of money is required to find out if something is even possible, it should be funded ideally by government to fast-track it, but then it should be migrated to the investment community.
I read in your report as well that one of your focuses was bringing investor interest back into the sector. I suggest a tax credit to the investors, similar to how flow-through shares encourage people to speculate in oil and gas or mining in this country. These ventures are high risk, so a tax credit helps investors take on the additional risk burden.
I find that, in that way, the money is spent more effectively and efficiently. When company A receives a cheque, company B wants one too, and it is difficult to say no to company B. With a text credit, all the best, most viable, sound and solid business proposals, the ones that have the appropriate risk-to-reward profiles, will be funded first by the investment community. If there is success in the industry, it will filter down.
Mr. Crawford: I have a slightly different approach to that question. We spend billions of dollars on university research, and we do not have a lot of products coming out the other end. We give a lot of money to companies in tax credits, and do not have a lot of innovations coming out the other end. The government needs to step back and ask how it can spend more effectively the money it is already spending on universities and companies.
Experiments are going on with Industry Canada, the National Research Council and the Natural Sciences and Engineering Research Council of Canada, NSERC. They are targeting funding in strategic areas. One area is transforming the forest sector to create new, higher-value-added products.
For example, NSERC gave John Kadla from the University of British Columbia about $5 million to organize all the researchers across Canada to find higher-value-added applications for lignin. That funding is a targeted investment at the university in basic research. That investment is a great move forward by NSERC.
NSERC has created business-led centres of excellence. I am on the board of directors of a network called ArboraNano. It brings together universities and research institutes with industry to conduct targeted research to turn nano-cellulose into high performance fibres. The money in that network can flow directly to companies to conduct the research as well as to universities.
This collaboration is a big experiment. We have never done this kind of thing before, and some interesting things are happening. The companies are learning some of the potentials from the research institutes and the universities, and the companies are explaining to the universities the kinds of things they need to have research done on to create a product. There is a lot of interchange between the universities, the research institutes and the companies. We are only a year and a half or so into this project and still have a few more years to go. It is interesting.
I encourage the government, when thinking about grants, to experiment with new ways of spending the money that will be more effective than what is happening now.
Our council is a big believer that it is not how much money we have but how wisely we spend it. We can do much more with less. The government must have flexible policies and programs to allow these groups to experiment with better ways of spending money.
The Chair: Thank you.
You may want to provide the answer to this question in writing. With your experience, can you say whether the hardwood sector of the forest or the softwood sector of the forest will have higher value in respect to bio-auto products?
Honourable senators and witnesses, thank you for being here this morning for this informative meeting. I declare the meeting adjourned.
(The committee adjourned.)