Proceedings of the Standing Senate Committee on
Agriculture and Forestry
Issue 12 - Evidence - December 7, 2010
OTTAWA, Tuesday, December 7, 2010
The Standing Senate Committee on Agriculture and Forestry met this day at 6:19 p.m. to study the current state and future of Canada's forest sector.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I see we have a quorum.
[Translation]
Honourable Senators, welcome to this meeting of the Standing Senate Committee on Agriculture and Forestry.
[English]
I want to thank Mr. Roberts for accepting our invitation. May I add, Mr. Roberts, that you are our last witness. There is no doubt in my mind, when we look at your CV and at the authority that you have not only in North America but across the world, that your presentation will certainly give us some highlights for our final report on the study of forestry, past, present and the future.
My name is Percy Mockler. I am a senator from New Brunswick and chair of the committee. Before we ask you to make your presentation, I would like to ask all senators to introduce themselves.
[Translation]
Senator Robichaud: Fernand Robichaud, from New Brunswick.
[English]
Senator Mahovlich: Senator Frank Mahovlich, Ontario.
Senator Ataullahjan: Senator Salma Ataullahjan, Ontario.
Senator Ogilvie: Kelvin Ogilvie, Nova Scotia.
Senator Eaton: Nicole Eaton, Ontario.
[Translation]
Senator Rivard: Michel Rivard, Quebec.
[English]
The Chair: Mr. Roberts, the committee is continuing its study on the current state and the future of Canada's forest sector.
Honourable senators, today we welcome Mr. Don Roberts, Vice Chairman and Managing Director of CIBC World Markets Inc.
I would like, for the record, to read part of Mr. Roberts's biography. Mr. Don G. Roberts has a bachelor's degree in agricultural economics from the University of British Columbia, a master's degree in forestry economics from the University of California at Berkeley, and both an M.B.A. and doctoral studies in international finance and economics from the University of Chicago. He was also chief of industry and trade analysis for the Canadian forestry department. Until 2009, Mr. Roberts was managing director at CIBC World Markets Inc. Mr. Roberts stepped back from his regular duties in equity research to develop a business plan for CIBC regarding opportunities in the emerging field of clean technology and renewable energy. CIBC appointed Mr. Roberts as vice-chairman of the new wholesale banking team on green energy and clean technology markets.
Mr. Roberts specializes in international commodity markets. Mr. Don Roberts is consistently ranked by institutional investor surveys as one of the top equity analysts covering the global paper and forest products industry.
Mr. Roberts, I want to reiterate that we thank you for accepting our invitation.
[Translation]
Before going to our witness's presentation, I will ask the honourable senators if they allow me to distribute the presentation now and to have the translation sent to them when it is ready.
Hon. Senators: Yes.
Senator Robichaud: Mr. Chair, the presentation was not submitted in time to be sent to translation, is that it?
The Chair: That is right. Thank you, Senator Robichaud.
[English]
Mr. Roberts, the floor is yours.
Don G. Roberts, Vice-Chairman and Managing Director, CIBC World Markets Inc.: It is a pleasure to be here. I view this as the start of a conversation this afternoon. I would like to make a few prepared remarks from a particular context. It is the context of a large national study that I had the privilege to lead in 2009 called the Future Bio- pathways Project study. I will comment on that study and our results and conclusions in a moment.
Even before we entered 2008, the worst global recession in 70 years, the forest sector was undergoing, both in terms of markets and policy, some of the most fundamental changes we have seen since the end of the colonial era. That is a strong statement. On the market side, these changes were the explosion in the Asian wood fibre deficit, the dramatic structural decline in the demand for paper and the emergence of the bio-energy sector. On the policy side, we saw fundamental tenure reform in some of the biggest forested countries in the world, including Russia, China and India. That had impacts even before we saw this major shock to the economy in 2008.
We had turmoil, and that turmoil was represented partly in poor financial performance. As you see in slide 2 in the deck, one of the metrics we use, especially in looking at the ability to attract capital, is the return on capital employed. Over a ten-year period — not just one, two or five years — it averaged around 3 per cent in Canada in the Canadian forest industry. Given that your cost of capital is around 11 per cent, this is not a good thing.
I will say that maybe misery likes company, because every region of the world, including Brazil, did not beat its cost of capital over those ten years. It suggests that something is going on. I would suggest we have, at least in terms of the traditional forest industry model, a model that is broken. We do need to change. Sometimes it is regulatory change; sometimes it is how we change the types of products we produce.
In response to that, we saw a core question come out. How do we go about transforming this sector?
In 2009, I took a year off and was approached by the Forest Products Association of Canada, FPAC, to lead a particular project called the Future Bio-pathways Project, which you may have already heard testimony on. The project was initiated by FPAC, but the important point, when they asked me to design this, was that it would be very much a collaborative approach. Right away we brought in FPInnovations, which has been important for the innovative solution to the problem, but also NRCan, and we had the deputy ministers of Ontario, B.C. and Quebec at the table, as well as a number of the companies. It is important that the project not only included the forest companies but also reached outside the sector to the new and emerging bio-energy companies. The reality is that maybe part of the problem has been our lack of innovative capacity within the sector. How do you reach outside?
This was a large approach, with many people involved. It is still ongoing. That is one of the things I would say at the beginning. One of the clear problems we identified, again not just in the Canadian forest industry but globally, is our lack of analytical capacity to look at the sector, in terms of both the developing innovations and also the receptive capacity to implement them, and also the ability on the part of governments — especially, I would argue, the provincial governments, but also the federal — to design the right policies.
This sector is interesting, given that we are dealing with the private use of a public resource. That has different challenges. The government does have more of a role than in many other sectors. That is just the reality.
The question is how to identify the right transformational strategies. I want to share with you some results, and then we will get into some of the implications. I will start with numbers for Quebec. We did this in Quebec, British Columbia and Ontario.
The first thing you have to note when looking at this sector is that location matters. You see a number of unique situations in terms of the cost of your fibre, which is important, and the type of products you can produce, but also when we are looking at the emerging forest sector in the future, it is the energy markets that you sell into. That will be a key variable we will have to play with in the future. The reality is that these energy markets are often controlled by the provinces. What prices you can sell energy into the market at is key. Location matters.
We took a hands-on approach, very practical, to ask at the end of the day whether people are willing to write a cheque for this sector. We had to look at the numbers in some detail. We looked at the return-on-capital metric. In slide 5, we give you the example of the traditional industry. Do not worry about the details. There is a story that goes with it. We looked at all the traditional products. You will see there is a cost of capital number there, 11 per cent. You will notice as well that many of the traditional products did not make it. Many of the pulp did not; certainly the paper did not. The solid wood did, so there were still some things to build upon as we looked forward. The message was this: Do we have to change? Yes, we have to change. The traditional is not good enough.
Then we looked at a whole slew of emerging products. It was important that these were not ones already commercialized. We tried to look at the whole pipeline of the innovations and technologies coming down the road.
There is a certain amount of guesswork involved as well as a great deal of analysis. As you see in slide 6, we found that there are a number of products, some traditional and many more emerging, that promise to beat our cost of capital. That is exciting and means that this is not a total writeoff. We are not dealing necessarily with an industry that is in sunset. However, it means that we have to change because of the number of new products emerging.
We looked at some of the key things. We identified some of these new products, and we can give you some case studies later.
How do we do it, then? Do we do this as stand-alone, new bio-energy products, or do we integrate with the traditional industry? A result came through clearly that it consistently works better if the traditional industry is the one integrating with the new. That is important, because right now in a number of the provinces we are seeing some of the new entrants coming in say, ``Just give me your wood and I will solve your problems.'' The downside is that they are often unfamiliar with how to harvest it, especially in a sustainable way. As well, they are duplicating a lot of use of capital. The reality is that it would be better if the traditional players adopted some of this. One of the purposes of this exercise was to educate them.
Going back to one of my first statements, our problem is with our analytical capacity. Our companies have been cut deep repeatedly year after year. Their in-house analytical capacity has been decimated in many cases; and it is the same with the provincial governments. This was a joint effort, as an industry, to try to take a collective look at this.
A conclusion is that getting a better return on capital and a better employment base is key. A number of the new emerging products, especially on the energy side, can give me better economic returns. As someone from Bay Street, it makes me quite excited. However, it does not do much for those from Main Street because it does not do much for jobs. Many of these new products do not have good employment multipliers, either direct or indirect. That is the sad truth. There is a trade-off here. The way to get both, in our view, is to take some of those traditional cornerstone mills and carve on some of these new traditional products. In that way, you might not create new jobs, but you would have a much better chance of preserving the existing jobs and the communities that go with them.
There are new products out there, but how you incorporate them is important. It cannot be done simply by reallocating the wood in the hope that a new player will create a panacea, because that will not happen.
We looked at more than 36 different technologies. Of the top ten that were the most interesting, five clearly had a large bio-energy role. One of the conclusions was that although we can go in a number of different directions with new composite products, other solid wood products or new types of paper, energy is the common theme.
Three specific technologies looked the most interesting. Sometimes we have to get specific in this sector because we always complain about overcapacity — too much newsprint and too much pulp. In truth, there is overcapacity in snake oil salesmen. We have so many people with new ideas, most of them PhDs who can talk a mile a minute who look quite impressive, but the reality is that you cannot bank on them. You have to do your due diligence and hard work, which is what we tried to do in this initiative. We named names of where we would be willing to put some capital. Three areas looked to be the most interesting. One is called fast pyrolysis. Essentially, we can take wood and turn it into a liquid within two seconds. With that, we can make electricity. Two years down the road, we think you will be able to make a drop in transportation fuel. What does that mean? The engines cannot tell the difference between wood, agricultural biomass or fossil fuel. This is really exciting. It is not just Canadian companies doing this; it is in conjunction with some of the biggest companies in the world. In this case, it happens to be Honeywell. That was one product we identified.
The second area is small-scale gasification plants. A company from B.C. happens to be a world leader in this. What is important often in this sector is size. Actually, this is one of the cases in which small really is better. There are a couple of reasons. One is that it does not take as much money. Instead of $300 million, it can be $30 million. The second reason is that is when you are looking at energy in this sector, it is important that we have heat sinks, where we not only produce power but also are able to use the heat. There are not many places that can use the amount of heat a great big power plant produces, but small-scale plants can use their heat. The third reason you want small scale in this sector is that if you put in a huge biomass plant, it totally disrupts the local fibre market. That is a problem because it drives up the cost and destroys the economics.
I lead a whole renewable energy group. The bio-energy is the Cinderella — the weak sister. Why? It is because of feedstock price risk. I do not pay for my wind or my sun, but I pay for my biomass, which goes up and down in price like a yo-yo. That is a real problem for investors. The good news is that we have had technological developments that allow us to be more efficient on size. That is greatly exciting because size is important. It also fits into a major theme — driving the whole energy sector around the world towards more distributed power with less need for the huge nuclear and coal plants and greater need for more local plants, not always biomass but sometimes wind, solar or hydro.
The third area of technology is torrefaction. We do not take regular wood pellets, which we are negative on because their use does not create many jobs or much value and is driven primarily by regulation out of Europe. Essentially, we want products that we can upgrade, and we looked at specific technologies.
People sit back and look at the renewable energy sector and make general observations that are accurate in general, with exceptions. One thing is true: With respect to traditional technologies, like those dealing with landfill gases and some onshore wind, every form of renewable energy needs subsidy right now. None of them is competitive. They are changing over time. We have seen a 40 per cent reduction in solar panel prices in the last 12 months and a 15 per cent reduction in wind turbine process. That is exciting, but we are still too expensive. In the case of bio-energy, we are starting to see some of these new technologies become interesting without subsidy.
I will give you an example found on page 9 of the material. We looked at the fast pyrolysis where we create pyrolysis oil in less than two seconds. It is interesting what you can do with that oil. Even with very expensive biomass that costs $70 per dry tonne, if you want to generate electricity with it, you can substitute fuel oil down to $61 a barrel. Most people would not bet that oil will be down to $61 per barrel, but we now have this technology whereby we can produce it for generating electricity at that price, despite some expensive biomass. There are still some technological risks with this; do not get me wrong. We are currently building pilot plants for this. Honeywell, one of the biggest technology companies in the world, is in a joint venture with the Canadian partner. They are giving manufacturer's warranties on it. Think of the communities in the North that use fossil fuel as the main energy source. This cannot compete with gas yet, given that gas is the biggest impediment to renewable energy because the prices are so low. In some communities this looks interesting.
Also interesting is that the world leader in fast pyrolysis technology happens to be an Ottawa company, Ensyn. In order for Ensyn to leverage and deploy this technology, it has to go offshore. It is doing this in Malaysia because this product from biomass is not defined in our regulations as a renewable fuel source. It is made from biomass, but we have specific definitions in our renewable portfolio standards. I will give you some specifics on that in a moment. We cannot afford to have silly regulations; and we do have some.
Senator Robichaud: Will you mention those?
Mr. Roberts: I will give you specifics, because I think we have to talk specifics here in order to get capital flowing.
I look at the situation where the people at Ensyn are going to Malaysia. They have a joint venture, starting with electricity. What are they using? They are not using wood; they are using palm oil biomass. After they take the palm oil out, they use the fruit bunches. They are looking at producing about 32 million tonnes of this stuff. With that, you can produce the equivalent of about 41 million barrels of oil. At today's oil prices, that is an annual revenue of about $3 billion. They are doing it there because the Malaysians have defined this as a renewable energy source.
We have some regulatory impediments. I will be specific on page 12 when I look at those, but there are some general issues here. They are not just regulatory issues that stop bio-energy from coming down. There are four major impediments to making this work in the sector, why you get bio-energy in general.
The first is the low price of natural gas. That is a mixed blessing. On the down side you say, ``I cannot do as much wind, solar and bio.'' On the other hand, it is a lot better than coal. That is the first thing and that is beyond your control; you cannot do a thing about that because that is technology and the market working.
The second issue is having no price on carbon. We are seeing other jurisdictions doing that, either directly or indirectly, through renewable portfolio standards.
The third issue is the relatively low price of bio-energy you can get by selling it to the utilities. It is pretty low here. Ontario has increased its price, no question. However, it is different in some parts of the country, and it is very low. Ontario is doing 14 cents a kilowatt hour. New Brunswick is getting 7 cents to 8 cents, depending on the price of coal. You cannot make it work there. Some parts of the country have gotten on board and others have not. To make bio- energy work for electricity, to sell it into the grid, you need probably 11 cents to 12 cents a kilowatt hour, at least. Quebec is just at the margin. B.C. and Ontario are above it.
The fourth variable constraining adoption is limited government support here relative to other jurisdictions. We are doing some things. Capital has no allegiance; it will go wherever it makes money. When I look at other jurisdictions, the U.S., the EU and China are all more attractive for bio-energy; that is just the way it runs when I do the economics.
The good news is that of those fours things I identified, three are under the influence of government. You have levers to play with. Those three things are the carbon price, the relatively low price of energy you can get by the utilities and then the government support.
Let us look at examples on slide 12. These are what I call examples of excessively narrow federal policies or programs. The first is your renewable fuel standard as defined. There is a specific definition for the renewable fuel standard. It is not considered renewable if it is produced at any time in its production process in a facility that can also produce non-renewable fuels.
Let us get this clear: You can make pyrolysis oil in a plant right beside a sawmill. In fact, that is what some people in Alberta are doing now. They take out the bark and make this pyrolysis oil. To get it, they heat up the oil in the complete absence of oxygen.
How do we usually get heat out of biomass? We combust it; it is like a campfire. We put the wood in, blow on it and fire comes up. That is excess oxygen combustion. The second major route to get electricity out of biomass is gasification. We heat it up, put pressure on it and starve it for air. That allows the biomass to turn to gas, and we can do lots of things with that. The third route is to heat it up with no air. The main thing is the difference between the amount of air we put in.
Pyrolysis is essentially heating it up with some pressure but no air, and that changes the chemistry. That allows us to take this biomass and turn it into a liquid. It looks like cappuccino. It is a chemical soup. That allows us to do different things with it.
There is a local plant in Renfrew, Ontario. Right now, they are not overly concerned. You can produce this electricity from this pyrolysis oil right now. However, they are looking at something where they are producing drop-in transportation fuels. We can do jet fuel with this. It can go into cars. However, the refining has to be finished off in an existing type of oil refinery. That requirement means that it can no longer meet the definition of ``renewable fuel.''
The reality is that biomass is being used, but it is a matter of how we are processing it. In general, it is good public policy to measure the outcome, not how you do it. Let the market figure out the process.
That is a specific example of a bad regulation. That is one reason they are looking at doing this on scale in Malaysia.
It is also not considered renewable if you are using it in heating fuel. The definition is such that any kind of heating fuel that you use, whether biomass or from fossil fuels, has to be able to blend with fossil fuel. In this case, you would not blend it.
We are getting hung up on technical definitions and missing the big picture. What do we want? We want renewable energy. We want things that have less of a carbon footprint. We want to use the biomass because it has a better economic proposition for our existing industry.
That is an example on the renewable portfolio standard and two narrow definitions that impede the economics.
The second thing I would look at in terms of where we are excessively narrow is dealing with Sustainable Development Technology Canada. SDTC has a $500-million NextGen Biofuels Fund. This is meant for next- generation fuels. It is not for the first-generation fuels made from corn ethanol, et cetera, but for cellulosic ethanol and so forth. Our dilemma is that they have had this for a while and they have not put up the funds. They cannot find many good projects.
Therefore, we put this $500 million there and are not drawing on it. An issue is why we are defining it just to be transportation fuel. Why do we not just say it should be bio-energy or biochemicals? Open it up, because we do have opportunities and new technologies that could apply it in different areas.
This is a case where we have defined the use of funds too narrowly. I throw out that example. That is one that will not cost anyone anything — just redeploy the funds.
Having said that, I must say that SDTC should be supported here in Canada. Compared to other jurisdictions, it has a very good track record.
I will not go into more detail. I have gone on longer than I anticipated. However, I thought I would just open it up if there are any questions or comments. We can take this discussion anywhere you would like to go.
The Chair: That was well presented, Mr. Roberts, and we will have questions.
Senator Eaton: Thank you, Mr. Roberts. I would like to ask you about things other than biofuels. I do not find it as interesting as some other things that the wood industry is producing. First, of all the interesting things we have heard, and you were talking about research, there seems to be a common problem. No one has been able to pin it down, though they all agree it is a problem. That problem is how to get products that are showing great promise, like this nano-crystalline cellulose for car parts, from research or trial into commercialization.
Mr. Roberts: What they need to commercialize them is often capital, because the plants to produce these things are not often cheap. They need a bit of a track record — that first commercial plant.
I have a project finance team that reports up to me. What do we need? We need a track record of what are the unit costs and what market is there. Often they cannot provide that, because it is too early.
We often have enough money at the very early stage where there is high risk, high return. We have a lot of money where there is low risk, low returns. Those folks right in the middle who are moving toward commercialization have the biggest challenges.
Something that would really help drive that will not cost Treasury money, which is important in the context we are in. It is about the procurement mandates, especially if you look at the auto sector where X per cent of the value must come from renewable sources. Then we say, ``Market, you figure out how you will do that.'' That is a key thing.
People often complain about the risk averseness of our corporate culture. I think there is an element of truth in that.
Senator Eaton: We have heard about the lack of business ambition.
Mr. Roberts: Absolutely. I would say that although there are some exceptions in the forest sectors, right now it is not short of capital. It may come as a surprise to many of you, but go to British Columbia and look at the big lumber people; they have average net debt to total capital of 6 per cent. Typical of a cycle would be around 30 per cent to 35 per cent. They are choosing to put it in another direction. There is no question Abitibi has a problem.
Senator Eaton: Thank you for that. That is an interesting idea of getting commitments. With our export markets, with the new world you seem to think we are not competitive but surely in places like China and India, if we started building housing units that could be put together, if we started using cross-laminated timber, are there not potentially huge markets there that are available to us?
Mr. Roberts: There are. I put a slide on cross-laminated timber, slide 14, because that is quite exciting. In the pathways work, that came out one of the best. I do not think we have to even go to China on this. We can get closer to home even.
Senator Eaton: You could go to California.
Mr. Roberts: Go to California. Go to Canada. The reality is that they are doing this in Europe and we are not building with it here. One thing the government could do is simply provide a demonstration. You want to put up a new hockey rink; we do it there. We do it with the cross-laminated timber. Demonstration is one of the things. Bankers are willing. We are really a conservative bunch and we want to see a track record. That is the role of government.
Senator Eaton: It is bankers and building codes.
Mr. Roberts: It is politicians once in a while, too.
It is in the Canadian nature. How do we bust out of that? It is by showing demonstration in many cases. The market is really exciting. What I like about the cross-laminated timber is that I am not just dependent on the single family dwelling, which is up and down like a yo-yo and will be bad for another three to four years. Non-residential is really what we have to focus on.
I am quite excited about that. We have some companies looking. One thing that strikes me on the demonstration is that we think we have to go to California or China to do this. We are big enough in Canada to do this. I do not need a lot of data; I just need some data.
Senator Eaton: They used cross-laminated timber in the arena in Quebec.
Mr. Roberts: However, they imported the product.
Senator Eaton: They used it in the Richmond Oval.
Mr. Roberts: If you want my money, in order to build a plant, I want the economics of that plant. I want to know how to produce it. That is what we want to do. We want to be producing this so we need the examples where we are actually in the production. We will get that. We are starting to see companies move in this area.
The building code work has been critical to lay some of the groundwork. That is important. What would also really kick-start that is to put a price on carbon. Why? Look what happens to concrete and steel. That is when we really start to move in on the non-residential.
Senator Eaton: Why do countries like Sweden seem to be more adventurous? They have gone further ahead than we have in building noncommercial six-storey, seven-storey buildings, building bridges with wood. What has driven them to be more adventurous?
Mr. Roberts: The key element is the price of carbon. When you look at their alternatives, they are being forced out, the construction folks.
It is also a higher price of wood. That says, how do I get more value for it then? We have been the low-cost producer of lumber. We are the best in the world at producing two-by-four lumber. The problem is that we made a good living at it for a while. It was too easy. One of the worst things, in my view, that could happen now is that lumber prices come back. Then we take off the pressure and go back to the old game. We have had that happen in pulp a little. Pulp prices are well above where they will be in the long term, so that has taken some of the heat off. Sometimes you need a gun to your head to focus the attention. The Swedes consistently had a gun to their head. They have done that, but not made lot of money. We are watching that, but can we do the same thing on the technology but with our lower cost base? I think we can.
Senator Mahovlich: It costs more to do a laminated building than steel. The cost is very high at the present time. The factories are not accustomed to it. We are not in production yet.
Mr. Roberts: No, we are not in production yet. We are not there yet.
Senator Ogilvie: Throughout your presentation, you covered many aspects of the nature of forest product-related industries, quite a product range of opportunities or failures. The one that you spent the most time on, it seemed to me, was the fuel generated by pyrolysis.
You seem to imply that the technology is largely there and it can be done and is being done in some countries — you gave several examples — but you implied that part of the reason it may not be successful here at the moment is because of a couple of factors. You explained that it cannot be classified as a biofuel because of either the way in which it is distilled in the end through a traditional refinery or the way in which it can or cannot be mixed with hydrocarbon fuels and so on. You gave examples where you said that in Canada — I assume that is where you are referring to with your numbers — it can be competitive with fuel oil, as one example, down to $61 a barrel.
What I kept wondering as you were making these fairly substantial statements, with enthusiasm, was why is just the name of it a reason for it not to be successful if in fact you say it is also competitive with traditional fuels? One thing I would be suspicious of is that you are implying that because it cannot be classified as a certain whatever, it does not qualify for government subsidies of one form or another, whether that is investment special tax credits because it is a new thing, whether you want to tax us severely on carbon to make it competitive or some other kind of issue. In my simple way of looking at things, if I can be competitive at $70 a barrel and normal hydrocarbons are selling for $100 a barrel, and if there is a market of the volumes you imply, I should be able to be competitive without government subsidy or anything else.
Can you help me here?
Mr. Roberts: That is an excellent point. First, we are going to see this adopted in any case. It will be on a lower scale, partly because of risk aversion and partly because of a lack of awareness. For example, there is a plant being put up right now in High Level, Alberta, by Tolko to do exactly this, and in fact, he is going one step better. He is using 85 per cent of his oil for electricity, heat and power, essentially at the back end of the sawmill, using that to dry and then selling the rest to the grid. Do you know what he is doing with the other 15 per cent of the stuff? He is taking out phenolic compounds, which in turn will be processed into phenolic resins, which will feed every one of his OSB mills.
We are seeing capital hitting the ground now. The issue will be scale and how fast we do it. One thing that is interesting here and the concern I have is that this technology happens to be again in Ensyn but it is important, they are able to commercialize this because they have Honeywell as a partner. Honeywell brings a lot of credibility, especially manufacturers' warranties.
One of my concerns is that it will be deployed outside the country first. Our competitors will take advantage of it before we will. Three Brazilians will be in Canada in the next few months looking at this, and they can deploy it on scale. We will see it deployed here over time. Again I look at a small company and the amount of management time. They have to pick their partners. They can put one or two plants in Canada and put 15 plants elsewhere. I would go where I could put up 15 plants.
Senator Ogilvie: The specific example you used was Ensyn, an Ottawa company, having to go to Malaysia. We are dealing with pyrolysis of biomass. The background for this committee is forests. You gave as an example a situation where the waste biomass is being produced on an annual basis without destruction of the primary producing element. You are talking about using the fruit pouches and the fibre and so on. It is being generated continuously in the same area on an annual basis. If you put one of these things in a forest and you require a certain volume — looking at it purely from the point of view of using tree biomass to produce a pyrolysis fuel oil — considerable costs develop quickly after you have used the biomass in your immediate vicinity.
In the forest industry in Canada, we are seeing that these by-product processes are successful if there is an immediate supply of waste material. As well, there is the question of the lifetime availability of that waste material, which is very short in most cases.
Mr. Roberts: It depends on how you do it. I will give you the example of Tolko. Essentially, he is using the bark from a sawmill. Assuming that he will be in the business of producing lumber for a while, he will have that on a continuous basis. Instead of using the bark, he could expand that and use his chips and sawdust as well. That is an option.
One point is worth clarifying: One of the reasons you go to other places is the low cost of the biomass.
Senator Ogilvie: That is what I am saying.
Mr. Roberts: It is lower in Malaysia than it is here. That is why I gave the example of $70 per tonne when we can do it at $61 per barrel.
Senator Ogilvie: My point is the cost of the biomass and the cost to acquire the biomass. The biomass, in many places in Canada and North America, is free because it is waste that is not being used. Some of it is being burned in less than high-value areas.
The specific example you used is a renewable biomass source. You are not cutting down the forests and going further and further away from the plant because you are using the waste from the fruit that is produced, or at least in the example you have here.
Mr. Roberts: They could still do it. There is always a cost to biomass. I could sell it in many cases, or at least I have to handle it, which has an associated cost. In the example I gave you at the top of that slide, you will see different costs depending on the price of the biomass. The one on the left is zero. I do not believe we have zero-cost biomass anywhere but, if it were, it is down to $28 per barrel of oil. As long as I am sustainably managing my forests, I can go out and do whole trees. I have a steady stream of this, as long as I do it in a sustainable manner. They have fundamentally better economics in Malaysia.
Senator Ogilvie: I will not pursue this beyond this observation because I think there is some snake oil in here. In this particular example, they have 32 million tonnes of biomass available on an annual basis.
Mr. Roberts: Correct.
Senator Ogilvie: The trees do not move and are not cut down and sawed into lumber so that only the waste is used. Rather, this residue is from the fruit bunches and so on. However, when you are dealing with cutting down trees, you are continually changing that environment. Right now, we have some areas where you could have nearly zero cost waste biomass, but that will not last long, especially if we start using it in some form.
You have to look at a longer-term model in consideration of the cost of the biomass. We have heard from a number of people who are looking at this and have appeared before the committee that many factors come into play. It is one thing to pick up the waste that is dropped beside the roads during the existing harvests and haul it off and use it; but you only get to use it once.
Mr. Roberts: I see your point, but I do not think we are necessarily that far off. One point you are focusing on occurs in British Columbia, in particular, where much of the wood used has built up at the roadside over time. That is the one time we will pull that off.
Senator Ogilvie: I am using that as one example.
Mr. Roberts: There is no question that there is a cost to biomass, but we can still get a supply on a sustainable basis, whether it is the sawmill using its chips and bark, or even in the extreme example of purpose harvesting. There is no question that there is a cost. We stress tested this at $70. That is way at the top end of what we see on the delivered cost. We are seeing $35 or $40 on average in Quebec for Abitibi. That is one of the reasons we put that range in there. Where would I in the world put this first? It probably would not be in Canada on scale because I would go to where it is lowest cost. It is also interesting that in the case of Malaysia, they had put in their renewable portfolio standards. I do not have to do oil all the time. I can also use gas. Natural gas beats that because it is so low cost.
Senator Robichaud: You say that you have the numbers on bio-energy and pyrolysis and that it is doable.
Mr. Roberts: Honeywell has put product warrantees on it. Have they commercially produced it at this scale? They have done it at 100 tonnes per day but not at 400 tonnes per day, which is considered commercial production. It is not a huge scale-up effect, but there will be some, and we will want to monitor the numbers. There are definitely some uncertainties in the cost estimates. Investors that we talk to are willing to put money into it at the level of estimates that we are talking about. They are willing to put money into this with the current degree of confidence. We have people who are willing to finance this.
Senator Robichaud: Are they in Canada?
Mr. Roberts: Yes. They are Canadian and American. Tolko is putting money into it now.
Senator Robichaud: Did you say there was a plant nearby?
Mr. Roberts: Yes, there is a smaller plant in Renfrew, Ontario, where they have been doing this for some time. Their main product was not energy but rather food chemicals. In fact, you have probably eaten their product. Their technology produces the bulk of the liquid smoke flavouring that is put on hamburgers and so forth. They sold that technology. The technology is not brand new and has been tested in some respects. They sold the application of it for upgrading heavy oils to Alberta's Ivanhoe Energy Inc. for $100 million. This technology has had some degree of due diligence already done. The issue now is putting this into a different context.
Senator Robichaud: You talked about cross-laminated timber. Does glulam fall into that category?
Mr. Roberts: Yes, it is a crude, early form. We are getting better in our resins and technologies than just straight glulam.
Senator Robichaud: Yesterday we visited a Cascades plant in Lachute. They added some space in the plant and used glue-laminated beams, which came from Chibougamau. It cost them a little bit more. However, since they were in the recycling business and wanted everything to be carbon neutral, they went that way.
Mr. Roberts: It is one option. We are a bit more positive on cross-laminated timber because it has more strength characteristics and we have seen it produced in Europe already.
Senator Mahovlich alluded to something earlier. Right now, many of these little pilot plants are not economic due to their scale. It gets down to the importance of scale economies. I will give you the example I referred to earlier: Another straight commodity is the photovoltaic solar panels. Literally, there was a 48 per cent drop in prices in 12 months. That was scale effect. Essentially, the Chinese scaled it up and drew down the unit cost.
When we do the scale effect in lumber, it is dramatic. There are big differences in unit costs between a 500-million board foot mill and 100-million board foot. That is where we tend to go.
Cascades has an interesting marketing angle. You hit it on the head: It is using the recycled element, with recycled fibre coming into it. Part of their whole branding is to be green. You do not have to do that with recycled material.
Senator Robichaud: You talked about location. Do you mean close to the raw material, close to markets or both?
Mr. Roberts: It is both. It depends on what you produce. In general, wood, especially logs, is a bulky thing to move. By going from logs to lumber, you are almost dropping your transportation by half. You are not using 50 per cent of the logs when you do lumber. The lower the value added, the more you should be putting it out into the bush.
Energy is one of the things people talk about, but the real challenge with wood energy is that it has a low energy density; there is not a lot of energy per cubic metre. You need a way to ``densify'' that and then you can move it. One can look at these new generation pellet plants or pyrolysis. You want to do it in the bush.
When you start looking at some of the higher value solid wood products, you want to start moving those closer to the customer. When we will be building homes and components, especially, you want to customize it. You want low cost and you want some of this customized. To get it customized, you have to be closer to the customer.
Increasingly, I think we will be seeing the whole value chain on solid wood where the portion where it is put together like a Lego set will be done closer to the customers. Much of that will be done in the States, I think. Hopefully, it will be the Canadian companies doing that and we still create value for Canadians in the process. However, some of the high valued stuff might well be in the States.
When I look at cross-laminated timber, though, that can be done here and then shipped.
Senator Mahovlich: Many of the lumber camps have plantations now. We saw a plantation of poplars. They are planting them near their plant. Do you think this is where it is at? A tree takes a few years to grow.
Mr. Roberts: Yes. If you see what our competition is doing, that is the strategy: Treat this like an agricultural crop. You have it close to your plant. We can get our poplars maybe down to 12 or 15 years. For energy crops in Brazil, they have it down to three years.
We have gone halfway on the whole issue of treating this like a more intensively managed crop. We have looked at this and tied one hand behind our back. It is a social choice we have made. The hand we have tied behind our back is our reluctance to use genetic engineering.
Senator Eaton: It is not ours but other people's reluctance. They will not touch it.
Mr. Roberts: That is not always the case. There is the use of cloned stock, for instance. Europeans do that. We do not have to create mutant trees like the Chinese are doing, and they are doing things we would not want to do, but we can be much more progressive in terms of our selective breeding.
It does not mean you go out and do monoculture, because that has real problems. We want resilience in our forest, especially in the face of uncertainties on climate change. Just because you use fine-tuned genetic stock that has been more, you do not have to put that all in one spot.
A concern I have and we are seeing other countries focus more on those types of trees that can handle drought and warming much better. We are not doing that. This is not as much a federal issue as you see in the provinces. We are not talking about genetically-modified food crops where we are exploiting that genome to the nth degree.
We have been selectively breeding in agriculture for hundreds of years and we are not nearly as aggressive on that. We are not using the same techniques that agriculture uses.
Senator Mahovlich: I believe we saw some genetic trees in Cascades where they were taking a Japan poplar and attempting to modify it.
Senator Eaton: There was someone last week; that is all they do.
Senator Mahovlich: They are trying to find out what is great for our climate.
Mr. Roberts: Where it is spread out, it will be more on private lands. We have one of the best companies in the world in research for pines. It is called CellFor in British Columbia. They sell less than 5 per cent of their product in Canada, yet they do some of the best research out there. In their case, it is in the B.C. Ministry of Forestry regulations and that was partly in response to public concern. It was too modified in their view, but it was the same thing they are doing in agriculture.
[Translation]
Senator Rivard: Considering your extensive experience, I will ask you to predict the future. In your opinion, where will the Canadian wood industry be in five or ten years from now?
[English]
Mr. Roberts: I think we will be smaller. I think we will have more of a solid wood component than pulp and paper. Newsprint is dying. Uncoated freesheet, which Domtar produces, is dying. The components of the pulp and paper industry that will do best are packaging in tissue. We have an opportunity there.
I think we will see the cornerstone of our industry in solid wood complexes, often lumber, sometimes engineered wood products. However, they will also have an energy component to them. They will use the residuals that are not used in the solid wood product. Energy is not the highest use but it is key.
The way our forest industry should be looking at itself is more like the oil industry does. A barrel of crude comes in and we make a series of products from it. They do not just make gasoline, just as we make two-by-fours. We have to expand that. We will need more of an array of products, and in joint production. I think we will see more of that.
There will be changes in the regional distribution. I believe that the mountain pine beetle will have a worse impact on the communities in the interior of B.C than many of us realize. Is there a silver lining? It means the price of lumber will be higher than some people think. That is positive if you are east of the Rockies. It will be a challenge in some areas.
We will see some new players create partnerships with the existing players.
I will leave a parting comment. Often what I hear in the forest companies is that they almost pride themselves on wanting to be first to be second. They do not want to take the initial innovation risk. There is a problem. When we look at some of these new products, energy or chemicals or even some of the new solid wood products, where you need partners, and there are only so many good partners, you may want to be first to get that partner. That is one of my concerns. I am concerned that the ones we really want will already be taken and they will have exclusive arrangements.
Who are the leaders in biochemicals? The large European companies are not the world leaders; it is the mid-sized European companies are the world leaders. We should be having conversations with them.
Senator Robichaud: Are bankers too timid in relation to the forest industry?
Mr. Roberts: They are. I would say financiers; it is not just bankers. You need knowledge to take risk. One of the problems is that especially when there is an industry in turmoil and new technologies, you have to do due diligence in order to understand the technology risk. I took a whole year off just to study this subject. We want to make money on this, because we want to be better informed than others. Sure, I think investors are timid.
When you look at who provides the money for early-stage innovation, it is not bankers, and it should not be. You should not be financing that with debt. This is where your venture capitalists come in. Is Canada weak on venture capitalists? Yes. I would turn that around, though, and say there is only one place in the world that is good at it is the United States. Europe does not have venture capitalists. The Asians do not have them. This is a particular strength the Americans have developed. The good news is that planes fly a lot now between Canada and Boston and San Francisco. We can get them up here if we have some of the good prospects. I am not as negative as I used to be. Can bankers do more? Absolutely.
The Chair: Mr. Roberts, you mentioned that the debt equity ratio in B.C. is about 6 per cent.
Mr. Roberts: For some of the key companies, it is. I will not name specific names, but the average for the lumber sector in British Columbia is between 5 per cent and 10 per cent.
The Chair: Can you tell us where it would stand across Canada?
Mr. Roberts: Some of the eastern folks are not very high, in the 15 per cent to 20 per cent range. You have some who are way off the end. Abitibi is just coming out of Chapter 11. Some are as high as 70 per cent, and that is unacceptable.
The Chair: What is the average in Canada?
Mr. Roberts: You would be looking probably around 40 per cent or 45 per cent. Over a cycle, you would want 40 per cent.
The Chair: Other witnesses have shared with us that Canada's national forest sector has almost a four-pronged approach. I would like to have your comments. One is improving productivity and competitiveness; one is expanding and diversifying markets; one is branding environmental performance of our products and maximizing fibre value. Do you agree with that or would you add any other comments?
Mr. Roberts: Those are laudable goals, logical ones that we can execute. The devil is in the detail. How do we actually do that? On the branding environmentally, I think the Boyle initiative is world leadership, frankly.
The Chair: I was at the summit on forestry, held on November 19 in Fredericton, New Brunswick. Should we have a national forestry summit?
Mr. Roberts: I think we should as long as we back it up with action. We have had previous summits. We talk too much. We do not enough.
The Chair: Is that what we are doing here?
Mr. Roberts: No, but there is a cottage industry in summits. We must have action coming out of it. It is not just the public sector involved and the companies. Reach outside the sector to the non-conventional players, the new players, and get their viewpoints. If possible, try to get the financiers here. We feel lonely looking at this sector.
The Chair: Are there any other comments, honourable senators?
On behalf of the committee, Mr. Roberts, thank you very much for coming and sharing your vision. We are glad you are a Canadian.
(The committee adjourned.)