Community Economic Development - Documents

The opportunity discussed in this document focuses on developing a log yard facility within the context of broader forest development issues in the Kispiox TSA. there are opportunities for new forestry development, but their feasibility is closely linked to underlying problems facing the forest industry locally. Solutions to these problems require action by the provincial government.

Current Situation

The allowable annual cut (AAC) for the Kispiox TSA is approximately 1.1 million m3. The forest stands within the region contain mostly coniferous trees with some deciduous stands at lower elevations. Dominant species are hemlock and subalpine fir. Saw logs make up 57% and pulp logs 43% of the timber harvested.
Local licensees processed the majority AAC at local mills, of which there are four. On average, 10 to 15 per cent of the timber supply area harvest is exported from the area. When all sources of wood are considered, mills located within the Kispiox Timber Supply Area are considered net importers of fibre.
The total AAC has not been cut in recent years because of poor wood markets and high costs. With no operations occurring on the SCI licences, the undercut is increasing.
The forestry sector is very unstable in the region as SCI bankruptcy proceedings continue. The economics of forestry in the region are very poor as the approximate 50% pulp log profile makes harvesting and processing a costly venture.
The proposed Stewart Omineca road, if constructed, will provide some economic opportunities for the Hazeltons during construction and with on going road maintenance. Importantly, this road would provide access into several new drainages within the district, and a very large land base outside of the district containing significant volumes of good quality timber.

Impediments to Forestry Development

Impediments to forestry development include the following:

No natural gas supply
Typically stands now contain 50 to 80 percent pulp
Pulp logs have a low value and for much of the business cycle are worth less than the costs to harvest them
Opportunities to export logs from the Kispiox district are very limited.
The lack of capital investments in recent years means a significant road construction program is now required in the district.
The lack of investment and high level of uncertainty associated with forestry is exacerbated by the lack of progress in native land claims.

Development Concept

In order for the community to generate economic development in the forest sector, the following conditions are needed:

Creating a log market in the region by putting more of the allowable annual cut in the hands of small business.
Encouraging small business to work cooperatively on a log sort/yard that improves their chances of attaining an adequate return on their labour and capital.
Resolving the poor economics of timber harvesting in the Kispiox by seeking change to key provincial government policies and management practices.

Experience of Other Log/Sort Yards

Currently an estimated fifteen sort yards operate province wide an increase from two in 1995. Log yards are designed to operate on a steady volume of logs, with anywhere from 30,000 m3 to 50,000 m3 per year considered a minimum volume. The key to log yard economics is log cost and output value. Financial returns are highly sensitive to slight changes in log input cost (harvesting and stumpage) and log output values. In the Kispiox, the former is high and the latter low, making for a difficult operating climate. It is not expected that the required incremental value could be achieved in the Kispiox without a stronger market for both pulp and saw logs. Under the current economic and policy climate of low saw log prices and limited market for pulp logs it would be difficult to operate a full-scale sort yard at this time. However, this should not preclude an attempt to work toward a log yard as viability could be improved if underlying conditions change.

To successfully run a sort yard, the incremental value realized from the logs must be greater than the operating costs incurred in running the sort yard. Key requirements include the following:

Focus on handling and marketing predominantly higher value logs
Ensure continuity of supply by linking a major licence(s) to the facility
Select the right location to minimize hauling costs
Secure long-term commitment from participants
Develop a large pool of buyers

A Log Yard in the Kispiox

Obtaining more control and access over the timber resource could be facilitated by a log yard, but the following conditions would have to be in place:

reallocate timber quota (i.e. increase community access to timber)
find new uses for wood waste
reduced stumpage
allow log exports

In all cases, a log yard will fail to be viable unless there is a secure source of supply. In the Kispiox, this could be achieved by:

reallocating the SCI to others such as to increase the Woodlot program
allocation of the 5% SCI forest licence quota as mandated under Section 56 of the Forest Act.
small market loggers and woodlot operators should be given authority to scavenge useable trees from forests of low value under a salvage tenure/permit, that required the timber to be delivered and hand scaled at a log sort yard.
government could be convinced to advertise an undeveloped timber sale(s) within the Sustut to deal with the current bark beetle population.
With the expected deregulation of the electricity sector in BC, a cogeneration plant in the Hazeltons, which has been discussed for many years, could become feasible and create a solution to the pulp log content in the timber profile.

Recommendations

Lobby government to have the Kispiox District declared a ‘special economic zone’ requiring a fundamental change in how the forests are valued and managed. This should be done through the development of a forestry position paper. The paper would include:

Blending of stumpage rates across the entire District and evaluating right-of-way timber at $0.25/m3.
Investigate the opportunity to pool stumpages into a ‘Kispiox silviculture’ account which would be used to convert poor quality pulp stands into new forests using harvesting and planting as a ‘silviculture’ tool.
Modifying utilization standards and bucking and waste assessment standards to allow pulp quality timber to be considered waste without financial and cut control penalties.
Approving long term export of surplus whole log chips.
Encouraging market based stumpage to evaluate the true value of logs.
Supporting the concept of ‘scavenger harvesting permits’.
Support the construction of the Stewart Omineca Resource Road.
Encourage an expansion of the woodlot program in the District.

Promote the establishment of a log yard to assist woodlot operators and others in securing markets where the highest log values can be obtained.

Solicit funds from government sources (e.g. HRDC, CFDC) to hire a facilitator to promote a strong and united community position.

²^Introduction

2.1 Background

The Kispiox area has been hard hit by the downturn in the forest industry. Closures or intermittent operations at both Carnaby and Kispiox mills have contributed to the Kispiox area having one of the highest unemployment rates in the Province. In response to the current situation, the Village of Hazelton has commissioned Lions Gate Consulting Inc. to develop a natural resource strategic opportunities analysis and action plan.

The project will:

Update the Forest Sector Action Plan in the Kispiox TSA, and include a review of the other resource sectors including mining, tourism, oil and gas, and fisheries;
Complete viability analysis/feasibility study for one or two key opportunities thereby benefiting the economy of the community; and,
Prepare a prospectus and marketing program for the area.

The resulting information will be utilized to attract investment to the area. As the lead proponent, the Village of Hazelton is cooperating with neighbouring local governments and First Nation communities. The intention of the project is to identify viable business opportunities and industry to attract investors that will benefit the entire community of the region.

Two previous reports, a Current Situation Analysis and a Cluster Assessment, were prepared as part of this project. This stand-alone feasibility assessment is one of two to be prepared as part of the Terms of Reference. A community investment prospectus and marketing plan were also prepared under separate cover.

2.2 Description of the Opportunity

During the interview program carried out for this project, ongoing problems in the forest sector, and the inability of the community to bring about any changes to resolve these, were seen as major impediments to community development. The Northwest has a long history of marginal forestry development and the existing government policy framework simply does not work for the Kispiox. The problems and possible solutions have been well documented several times over, both in public and non-public research prepared by the Ministry of Forests and other provincial agencies.

The opportunity that we have assessed in this document is based on the following assumptions:

An assessment of a single development option such as a log yard or value-added facility did not make sense because there are so many fundamental problems with the regional timber supply and forest economics. A host of development issues have to be addressed simultaneously.
After 40 years of industrial forest development in the region, the industry is on the verge of complete collapse. The interest in new investment in this industry is practically non-existent because there has been little or no return on capital.
The existing provincial policy framework has helped choke the forest economy and will certainly prevent any long-term recovery, barring an unexpected resurgence in forest commodity prices.
Commodity prices for lumber, pulp and chips are in long-term troughs – in real terms, the prices for these products have not risen for over 20 years. Prices may well improve, but for how long and to what level? The inability to economically deal with the pulp content in the timber profile is the single-most significant contributor to industry troubles.
There are contractors, small business operators, woodlot owners, First Nations and other stakeholders who are committed to the Kispiox and who are willing to work towards any attempt to rebuild the forest sector economy.

The following assessment looks at possible way and means of obtaining more local control over the Crown timber harvest, how this might work toward a local timber market that could support viable processing down the road, and what changes in provincial policy are required to make this all happen.

³^{Current Situation Assessment}

3.1 Allowable Annual Cut

The most recent allowable annual cut (AAC) for the Kispiox TSA is outlined in Table 3‑1. This AAC is based on a determination made by the Chief Forester in 1996. The determination was made as part of the timber supply review required under the province’s Forest Act. In setting the AAC, the Chief Forester considers information ranging from technical forestry reports to public input and the government's social and economic goals. AAC determinations must be reviewed at least once every five years. A new timber supply was announced in October of 2000 and is in progress.

Table 3‑1: Kispiox Current Allowable Annual Cut

Kispiox TSA - Allowable Annual Cut Effective 1996	m3	%
Forest Licences Replaceable	788,065	72.13
Forest Licences Non-Replaceable	30,435	2.79
TSL > 10000 m3 Replaceable	11,980	1.10
TSL <= 10000 m3 Replaceable	5,054	0.46
TSL (WITH AAC), NON REPLACEABLE	0	0.00
Pulpwood Agreement TSL	0	0.00
SBFEP Forest Licences Non-Replaceable	0	0.00
SBFEP Any Category	0	0.00
SBFEP Category 1	172,710	15.81
SBFEP Category 2	11,020	1.01
SBFEP Bid Proposal	58,736	5.38
SBFEP Temporary AAC Increase	0	0.00
Woodlot Licence	3,611	0.33
Community Forest Agreement	0	0.00
Forest Service Reserve	11,000	1.01
Total	1,092,611	100.00

Source: Ministry of Forests

3.2 TSA Harvest Profiles

The forest stands within the region contain mostly coniferous trees with some deciduous stands at lower elevations. Western hemlock (47.5%) and subalpine fir (31%) are the predominant species in the TSA. Spruce (12%), and lodgepole pine (8%), both mainly within young stands, cedar (1%) and young deciduous are the other species present. The species harvested and their respective proportions of the total harvest are as follows: hemlock 52.9%, subalpine fir 31.6%, spruce 7.8% and pine 3.6%. During the four years ending on December 31, 1995, saw logs made up 57% and pulp logs 43% of the timber harvested.

3.3 Timber Harvest Allocations

In the past, local licensees processed the majority of the Kispiox TSA allowable annual cut. Skeena Cellulose Inc. (SCI) has a replaceable licence of 576,815 cubic metres a year making it the largest licensee. Kispiox Forest Products has 64,124 cubic metres and 30,435 cubic metres in replaceable and non-replaceable forest licences, respectively. Kitwanga Lumber (92,180 cubic metres) and Bell Pole (55,414 cubic metres) are also major licensees.

Table 3‑2: Kispiox Current Allowable Annual Cut

Kispiox TSA - AAC Commitments m3 Effective 1996
Forest Licences Replaceable		Total	Conventional	Unapportioned Volume

A16818	KISPIOX FOREST PRODUCTS LTD.	64,124	64,124
A16831	SKEENA CELLULOSE INC.	576,815	576,815
A16832	BELL POLE COMPANY	55,414	55,414
A16833	KITWANGA LUMBER CO. LTD.	92,180	92,180
Total		788,533	788,533

Forest Licences Non-Replaceable

A57426	KISPIOX FOREST PRODUCTS LTD.	30,435	30,435
A60281	ANSPAYAXW TENURE CORP.	53,406		53,406
Total		83,841	30,435	53,406

TSL > 10000 m3 Replaceable

A16860	CANEMA TIMBER LTD.	11,381	11,381

Total Commitments		883,755	830,349	53,406

Source: Ministry of Forests

The Kispiox Timber Supply Area produces a variety of different sized logs as well as a relatively large pulp log component. These factors lead to wood flows between companies attempting to obtain the most appropriate size and quality of log for their operation. On average, 10 to 15 per cent of the timber supply area harvest is exported from the area. However, when all sources of wood (including wood from other timber supply areas and private lands) are included, mills located within the Kispiox Timber Supply Area are considered net importers of fibre.

3.4 Harvest Levels

The total AAC has not been cut in recent years. Since 1996, poor markets have been the main cause of the undercutting. As a result, many licensees have fallen short of, and remain below cut control obligations. With no operations occurring on the SCI licences, the undercut is increasing.

Table 3‑3: Harvest Volumes for the Kispiox Forest District (1991 to 2001)

Fiscal Year	Private Land	Crown Land
1991/1992	20,845 m³	970,270 m³
1992/1993	23,155 m³	1,195,030 m³
1993/1994	18,212 m³	1,310,504 m³
1994/1995	59,095 m³	1,172,224 m³
1995/1996	53,263 m³	1,185,048 m³
1996/1997	36,921 m³	957,558 m³
1997/1998	33,565 m³	804,284 m³
1998/1999	26,187m³	1,007,840m³
1999/2000	18,810 m³	1,099,850 m³
2000/2001	10,714 m³	814,570 m³
Average Harvest (1991-2001)	30,075 m3	1,051,720 m3

Source: Ministry of Forests.

From 1987 to 1995, due to the inaccessibility into parts of the northern TSA, a concentration of harvesting has been occurring in the southern portion of the TSA. With bridge construction over the Babine River in 1996, access opened up the area north of the Babine to development. While this has spread the distribution of the harvest over the broader land base, it has also resulted in higher average harvesting costs due to increased travel times.

3.5 Kispiox Forest Industry

3.5.1 Overview

The four sawmills and the whole log chipping plant process most of the Kispiox Timber. In recent years virtually all of the wood chips produced in these facilities has been processed at the Skeena Cellulose pulp mill at Prince Rupert. When it was last operating, the SCI mill at Carnaby employed approximately 144 people, while the chipper employed approximately 15 people. With SCI now in receivership proceedings, the mill facility is now idle.

The mill operated by Kispiox Forest Products Ltd. (formally known as Isolite-Stege) employs approximately 88 people at South Hazelton. C GED Forest Products Ltd. (formally operated by Westar) and Kitwanga Lumber Company Ltd. employ 50 and 42 people, respectively, at Kitwanga. Companies located within the Kispiox Timber Supply Area also process timber from other timber supply areas, private land, Reserve land, and the Small Business Forest Enterprise Program.

3.5.2 Industry Stability

The forestry sector is very unstable in the region as SCI bankruptcy proceedings continue. Until this situation is resolved, or at least clarified, it is difficult to discuss the best short-term approach to stabilization. This is because a significant volume of Crown timber harvesting rights is tied up by SCI and until it is known what the plans are for the company, the community and local businesses/contractors have little opportunity for movement. The economics of forestry in the region are very poor as the approximate 50% pulp log profile makes harvesting and processing a costly venture. The picture is unlikely to improve as the best, most accessible timber is now gone. Poor economics have dogged SCI and its predecessors, Repap Enterprises, Westar and Columbia Cellulose, for decades and may suggest that provincial forest policy and regulations, including those involving the allocation of Crown tenure, simply do not work for the region.

Following are brief summaries of the existing sawmills that rely on logs originating from the Kispiox forests.

Carnaby Sawmill

In 1986,Westar constructed a German “Linck” technology sawmill at Carnaby to utilize mainly 8” to 18” top diameter saw logs at a processing speed of 12-15 logs per minute. The Carnaby mill was targeted to produce green “genban” lumber for the Japanese market. A number of log related, market related and engineering/operational/technology issues limited the mills chances of succeeding during the ten years that followed its start-up. One of the major problems the mill faced was the negative impact that processing small logs under 10” top diameter had on the mills productivity and conversion costs. To overcome this problem and at the same time to secure additional larger logs Repap, the new owners made the decision in 1994 to install a $3 million small-log line in their Smithers’ mill to cut the 3” to 10” diameter small logs, freeing up the larger logs for the Carnaby sawmill.

In addition to the Linck sawmill, the site contains a log merchandizing deck, a whole log chipper, 3 kilns, a mechanic shop, log weigh scales and a waste burner.

When it was last operated in March 2001 the sawmill employed approximately 144 people. In January 2002, the employees were terminated during negotiations surrounding the selling of the SCI assets. It is not known whether the new owners will restart the Carnaby sawmill as it exists or will reconfigure it.

Hazelton Whole Log Chipper

The Hazelton whole log chipper owned by SCI processes pulp logs into chips. It employs approximately 15 people, and processes approximately 55,000 cubic metres of pulp log per month.

The whole log chipper has been idle since April 2001.

Kitwanga

The Kitwanga sawmill was purchased by SCI in 1998. It has been cutting primarily cedar harvested from SCI’s forest licences and timber sales. Although it is an older mill, it has been profitable on the cedar program. It employs approximately 43 people. Annually it consumes approximately 175,000 cubic metres of logs.

Kispiox Forest Products ltd.

Formally the Isolite-Stege sawmill located in south Hazelton, employs approximately 88 people. The mill is designed for logs 12” and larger and previously traded the smaller logs to SCI. This sawmill has operated inconsistently over the past 10 years being a marginally economic sawmill with low returns.

Woodlot owners

Currently there are 12 woodlot owners in the Kispiox TSA. Combined these operators have an annual allowable cut of 3,600 cubic metres.

Small Business Forest Enterprise Program

The small business program has the second largest harvesting allocation with an annual harvest of 242,466 cubic metres. Most of this volume is processed within the district because of the pulp percentages.

Bell Pole

Owns a forest licence of 55,414 cubic metres annual harvest. It does not have a processing plant in the district, and trades logs for cedar poles.

3.5.3 Historical Situation

In a January 2000 report prepared for then-Premier, Mr. Dan Miller, an independent consultant’s report outlined the conditions facing the forest industry and communities in Northwestern BC and made recommendations for resolving the instability and uncertainty that has defined regional forestry over the last 40 years.

The report describes the forest resource, operating conditions, costs and markets for forestry products produced throughout the region and includes recommendations to revitalize the industry. The report recognizes the area as having inherent poor quality timber and high road development costs that are not indicative of either the coast or interior of BC. The only area that has similar poor quality timber and high development costs is in the Revelstoke area.

The report identifies the importance of the forest industry to the communities in the area, but also acknowledges that the forest industry has been a chronic poor performer obtaining low returns with high operating costs. It recommends establishing a ‘special economic zone’ for the Northwest that would be monitored by 5-year Economic Plans under the Job Protection Act.

Once the ‘special economic zone’ is established, the report recommends changing the timber administration and stumpage appraisal policies to reflect the high pulp content and the low quality forests, and the extraordinary road development and operating costs.

Recommendations for the Kispiox District include:

Changing timber utilization, bucking and waste assessment standards.
Blending stumpage rates across the district.
Pricing right of way timber at $0.25 per cubic metre.
Replace regular cruising with barometer cruising.
Calculating stumpage for spruce, pine and fir, based on stumpage appraisal zone 5 instead of 6.
For log exports, set the fee in lieu of manufacturing at one dollar per cubic metre and allow up to 30% of the cut to be exported.
Grant approval for long term export of surplus whole log pulp chips.
Develop and sell through the SPFEP, previous undercuts to the program, and other economically viable unallocated timber which is surplus to the needs of the forest tenure holders and their contractors.
Allow forest tenure holders to carry forward undercut volume and refrain from reducing a forest tenure holder’s AAC for violating annual or periodic cut control requirements.
Endorse the concept of a ‘independent logging agreement’ whenever a forest tenure holder is not able to harvest within normal cut control requirements. (a independent logging agreement would allow company contractors to harvest volume not utilized by the company with the freedom to sell the volume to others, compensating the company for silviculture and road development costs).
Exempt the forest tenure holders from the appurtenancy clause, provided the licensee operate at a level agreed to in the Economic Plan.

Also as part of the 5-year Economic Plans, industry would commit to resuming operations, utilizing all of their annual allowable cuts, working with the Ministry of Forest and BC Environment to streamline administration costs, investigate the potential for retention logging and integrating helicopter logging with conventional logging, preparing short and long term action plans for upgrading and harmonizing existing sawmills with the available log supply, and rationalizing operating and manufacturing facilities between West Fraser and SCI, including a small log line in the SCI sawmill in Terrace and investigating the opportunities for producing secondary products at the existing C-GED sawmill in Kitwanga.

3.6 New Developments

3.6.1 NWBC Timber and Pulp

Currently all SCI assets have been offered to Northwest BC Timber and Pulp by the BC Government, the major shareholder. The transfer of ownership is to occur in late April, once the unsecured creditors approve the proposed settlement.

Kitwanga Lumber has been successful as a cedar sawmill , so it is expected that they will continue in the cedar business. If harvesting on SCI tenures resumes under new ownership, it is envisioned that adequate cedar logs will be made available to continue running this sawmill.

The Carnaby sawmill has high operating costs relative to other dimensional lumber sawmills in BC. The sawmill requires approximately 600,000 cubic metres of logs on a 2 shift bases, preferably sound and greater than 20 centimetres top diameter (8 inches). To fully fibre this sawmill logs must be acquired from other TSAs.

In order to acquire a significant portion of its log requirements from the Kispiox district, the company must have an economic solution for the pulp logs. Processing the pulp logs through the whole log chipper is not always an option especially during low pulp markets.

An opportunity may be available in the short term, to acquire logs from forests located in the Lakes Forest District that are under heavy attack by the mountain pine bark beetle. This timber could be sourced from small business timber sales or from new forest licences. The economics of sourcing timber from the Burns Lake area would require further analysis because of the relatively high log transportation costs. It is doubtful that sufficient timber from the Lakes District could be acquired which would allow the sawmill to operate at full capacity. Another supply of suitable sawlogs would need to be acquired.

3.6.2 Stewart Omineca Resource Road

The community of Stewart in conjunction with several partners commissioned an impact study on a proposed road connecting the community of Stewart, located on tidewater, to the Kemess Mine located approximately 230 kms in a straight-line northeast of Hazelton. This proposed road involves improving several sections, accelerating and extending planned forestry roads, and constructing new roads to complete the connection. The proposed route utilizes the Kuldo FSR, joining with the Kispiox Trail as it heads westerly towards Cranberry Junction and Highway 37.

The total distance from Stewart to the Kemess Mine along this route is approximately 475 kilometres.

In total, approximately 91 kilometres of road needs to be upgraded and 136 kilometres of new road constructed. The total construction costs are estimated at approximately $40 million dollars.

This road if constructed, will provide economic opportunities for the Hazeltons during construction and with on going road maintenance.

Much of the remaining old growth timber is found in areas lacking developed road systems. This road would provide access into several new drainages within the district, and a very large land base outside of the district containing significant volumes of good quality timber.

3.6.3 Upper Skeena and Sustut Timber

The mountain pine bark beetle has attacked timber in the Sustut area for well over 15 years. In 1987, the government advertised a forest licence in this area to deal with timber losses incurring from this bark beetle.

Local sawmills from the Smithers and Hazelton areas applied for the timber, however it was awarded to applicants from the Prince George area. Subsequent to the award, the land base was removed from the Prince Rupert Forest Region and placed into the Prince George Forest Region.

Access into the Sustut Valley is currently provided by BC Rail. There is no direct road access into the area from the communities of Prince George or Ft. St. James. Within the area a system of roads lead from rail re-load centres into the adjacent forests. Due to the remoteness of the area, the difficulty with access, and the high delivered log costs, other forest licence holders in the Prince George TSA have been reluctant to move portions of their operation into the area. As a result, the mountain pine bark beetle has not yet been controlled with approximately 800,000 cubic metres of pine currently under attack. The balsam bark beetle has also been destroying timber in the area, however harvesting these stands are a lower priority as balsam has a lower timber value.

A road from the west would provide easier access and lower transportation costs. Once constructed, the logic to continue shipping timber to the east on the more expensive rail system would become questionable. Log transportation costs are substantially cheaper to Hazelton, Terrace, Smithers or Houston than to Fort St James and Prince George.

Road access would provide the Ministry of Forests the ability to better manage forest health and fire protection issues.

⁴^{Impediments to Forestry Development}

The forest industry in the Northwest and specifically the Kispiox Forest District, has struggled for over 25 years to become a viable industry. When prices are high for pulp and lumber, the industry makes money. During times of depressed prices the companies are forced to curtail sawmilling operations, direct harvesting into the better quality and lower cost stands, and ultimately to leave pulp logs in the woods.

4.1 Natural Gas

Unfortunately Hazelton has never had access to natural gas. Natural gas provides industries in much of the province with a cheap source of energy, used mostly for heating.

Financially viable sawmills like L&M Lumber in Vanderhoof have installed state of the art cogeneration heating facilities to burn hog fuel that provides all of their heating needs without depending on natural gas. These cogeneration facilities cost upwards of 15 million dollars and are designed to utilize sawmill wastes.

4.2 Pulp Log Profile

The old growth forests in the Kispiox district can be classified as transitional forests, growing between coastal forests to the west and interior forests to the east. They are mostly climatic forests heavy to hemlock and balsam that have not been burnt by fires in the past 200 to 300 years. Typically these stands contain 50 to 80 percent pulp.

Pulp logs are manufactured into chips, however these chips are more expensive than the by-product chips produced from sawmills. As a result pulp logs have a low value and for much of the business cycle are worth less than the costs to harvest them.

Sawmill operators are constrained by the value of pulp logs. When the price for pulp logs is lower than their harvesting cost, the saw log component is required to absorb additional costs making them more expensive.

4.3 Pulp Markets

When prices for pulp are low the value of pulp logs are also low, so forests with high percentages of pulp cannot be economically harvested.

Pulp prices are at their lowest levels in 25 years. Many economists are predicting that the pulp market will improve in the second half of 2002, however prices may still be below the breakeven cost of the Prince Rupert pulp mill. Until the demand for pulp logs increases either as a result of restarting the Prince Rupert pulp mill or there is a shortage of pulp logs on the Vancouver log market, prices and demand for pulp logs will remain below harvesting cost.

Without an increase in the price for pulp logs, harvesting operations will continue to be curtailed in the Kispiox district even with opportunities to export logs. This situation may not even be helped by the ability to export logs, as the demand for Kispiox timber is again believed to be low.

The Kispiox forest industry has always been impacted by the economics of the pulp market. Current forestry policy is not flexible enough nor does it provide adequate incentives to deal with the high component of pulp logs found in this district.

4.4 Saw Log Markets

Opportunities to export saw logs from the Kispiox district to domestic or offshore export markets are limited. Domestic prices for saw logs are depressed due in part to the mountain pine bark beetle epidemic in the interior and low demand for hemlock lumber in Japan which has resulted in sawmill closures on the coast and weak prices on the Vancouver log market.

Offshore log prices are higher than domestic prices, however the forests in the Kispiox contain few of the higher-grade logs that command preferred prices. Because of the tree species and characteristics, most of the higher quality logs in the district fall into the lower priced and more common export grades.

The ability to export large volumes of saw logs is limited by the ability to market pulp logs.

4.5 District’s Increasing Pulp Percentage

During depressed pulp markets, sawmills have continued to operate by harvesting stands lower levels in pulp and closer to the sawmills than they would have had the pulp markets been buoyant. The end result is that most of the better quality stands and those in the valley bottoms have been harvested, especially in the southern portions of the District.

Continuing to harvest stands with less pulp during times of low pulp markets, means that on average the District’s average pulp percentage has increased from that present 20 or 30 years ago. This means that in the future, the health of the pulp market will have a greater and greater impact on the operational viability of the forest industry, if the status quo continues.

4.6 Roads

Returns to the forest industry in the Kispiox have been marginal since 1995-1996 when pulp and lumber markets were good. Pulp and lumber markets have been poor over the past 5 years, which has resulted in minimal capital investments being made. Road construction into new timber stands requires capital investment. Much of the timber previously accessed by roads has now been harvested. A significant road construction program is now required in the district.

Capital investments in roads will likely continue to be limited until the pulp market improves and the softwood lumber situation improves in Canada’s favour.

4.7 Land Claims

The lack of investment and high level of uncertainty associated with forestry is exacerbated by the lack of progress in native land claims. Some successful joint venture activities have occurred in many areas of the province, including the Kispiox, but the business climate could be improved once it is known what the implications are for Crown tenure.

⁵^{Development Concept}

The analysis in the previous chapter paints a bleak picture of the forest industry operating in the Kispiox district, but there are opportunities that should be pursued to revitalize the sector. This involves not trying to resuscitate the former status quo but seeking solutions that will allow the community to derive some socio-economic stability over the long-term.

5.1 Conditions for a Log Yard

Building a healthy and sustainable forest economy in the Kispiox cannot be based solely on actions by the private sector or local communities. The business climate for forestry is negative in the province and especially in the Northwest. At the provincial level, changes in forest policy are expected as the government has made a commitment to do so. Now would be a good time for Kispiox communities to ask the province for new approaches to sustaining what remains of the forest economic base. We believe a necessary first step is to create conditions for the following:

Creating a log market in the region by putting more of the allowable annual cut in the hands of small business.
Encouraging small business to work cooperatively on a log sort/yard that improves their chances of attaining an adequate return on their labour and capital.
Resolving the poor economics of timber harvesting in the Kispiox by seeking change to key provincial government policies and management practices.

5.2 Experience of Other Log/Sort Yards

Numerous studies have been conducted on log sort yards in BC over the last five years. These studies have been driven by the following key elements:

Individuals such as woodlot owners and private landowners who have a small volume of timber or a specific type of timber profile to sell, and are looking to secure a competitive price.
Established value added operators in the province who lack access to a secure supply of fibre. These operators are looking to obtain the specific fibre profile in a timely fashion and in the quantities they want.
New entries into the value added sector that cannot afford the risks of securing fibre and therefore need to seek out a reliable supply before committing to an investment.
Primary processing facilities that can no longer obtain their total fibre requirements from their tenures. The log sort yard provides an option that services some of this demand. The oldest sort yard in BC, the Ministry of Forest’s Sort Yard near Vernon sells upwards of 80% of its volume to major licensees.
The ability of sort yards to co-ordinate small fibre supplies from several clients and approach a major licensee to make a single purchase.

5.2.1 Future Role

If growth in log sort yards can continue then they will serve as a mechanism to better link the producers and harvesters of wood to the manufacturers of wood products across the province. One of the key success factors for all concerned is the proximity between harvesters, sort yards and manufacturers. A local log sort yard can function as a “Log Store” where logs can be purchased wholesale for sorting and grading and then sold at the retail level to various wood manufacturers.

The concept of a Log Store came from log home builders that spend up to 30% of their time looking for house logs. Further development of these Log Stores can be seen as an important infrastructure item for BC’s rural communities, providing log home builders and other value added manufacturers with the opportunity to reliably shop for their next load of raw materials within their local area.

As well, a series of log sort yards can provide woodlot owners and private landowners, and other harvesters, with expanded marketing opportunities for their logs. The sorting and grading services provided by a yard, plus the diversified customer base they attract can facilitate a wider definition of “merchantable” timber. The logs that do not fit the traditional market profiles may be saleable at your local Log Store and become merchantable as special grades. This may apply to birch, aspen, maple and other species and grades that are not acceptable to current buyers.

5.2.2 Log Sort Inventory

Currently an estimated fifteen sort yards operate province wide (not including some coastal sorts). This is up from the two log sort yards that existed prior to 1995. As well, there are now a growing number of wood stores starting to emerge across the province. Table 3‑1 identifies several of the log sort yards in the province and outlines their contact information.

5.2.3 Sort Yard Economics

Log yards are designed to operate on a steady volume of logs, with anywhere from 30,000 m3 to 50,000 m3 per year considered a minimum volume, depending on the price of logs. Lower volumes would be possible if the incremental value attained from lower volume continues to cover both the operating and fixed costs.

The real key to log yard economics, however, is not volume, but the log cost and output value. Anticipated financial returns are highly sensitive to slight changes in log input cost (harvesting and stumpage) and log output values. In the Kispiox, the former is high and the latter low, making for a difficult operating climate. Previous log yard studies in the Morice/Lakes forest districts and analysis of the Lumby log yard show that the difference between the two values must exceed $11 or $12 per m3 to justify the cost of handling the wood.

Table 5‑1: Log Sorts in British Columbia

Log Sort	Location/Mailing Address	Contact	Yearly Operating Period	Process for log purchase

MoF	Between Lumby & Vernon	Tom Milne T: 542-2687 Sue Gilowski T: 558-1742 F:542-3194	Typically from July to early February. Will be operating from May to early February in 1999	Weekly sales through sealed tenders on the lots. Individual would phone in and get a fax of lots up for bid in a particular week. The log sort will also accommodate direct sales of any sort (presently more than 50 sorts). Also will broker logs from tenure related lands.
Riverside Forest Products	Lumby	Chris Pieper T: (250) 546-3171 or cell: (250) 308-6458	Operate from July 1^st to March 1^st yearly	Contact Chris and identify the type and volume of logs required. Handle a wide variety of wood and volumes.
Shuswap Log Sort Inc.	Box 560 Chase, BC V0E 1M0	Bill Rosa T: (250) 955-6486 F: (250) 679-8761	Year round operation.	People looking to buy or sell logs simply make contact with Bill and efforts are made to make the match. This log sort specializes in dry and dead logs.
Swan Lake	Vernon	Thomas Winters T: 558-6553	Year round operation.	Log sort specialize in fir sorts but also accommodates other species as well. To purchase or trade logs, individual simply contacts the log sorts to discuss their needs. Will place logs for sale for individuals on consignment bases. Sell logs or will trade logs.
Creston Log Sort	Creston	Jim Smith T: 428-2022	Recently began operations.
Forest Glen Wood Products	Nakusp	Blaine Coates T: (250) 265-3015	Operating year round – new operator	Different volumes and species depending on the time of year. Hand fir, larch, spruce, pine, and cedar. Do get some house logs. Contact for current inventory.
Kootenay Custom Log Sort	South Slocan PO Box 129 3050 South Slocan Stn. Rd. South Slocan, BC V0G 2G0	Rick Biller T: (250) 359-7678	Operating year round.	Biweekly bidding process right now. Will cater to individual requests. Provide a variety of sorts. Currently getting some nice spruce and fir into the sort yard.
Hewett Holdings	South of Kaslo Box 753 Kaslo, BC V0G 1M0	Len Hewett T: (250) 353-2909 F: (250) 353-2905	Operate most of the year.	A variety of species including cedar, fir, and white pine. Cater to individual request, simply contact and discuss needs.
Revelstoke Log Sort	Box 3199 Revelstoke, BC V0E 2S0	Bob Clarke T: (250) 837-5733 Or sort yard: 837-5329	Operates 10 months of the year. Sort yard is usually down in April and May.	The sort yard typically does 16 to 18 sorts. Contact Bob with the type of logs you are interested in. The log sort sends out tender form by fax to individuals matching the sort profile. Individuals typically have ten days to view the logs before they are sold. The log sort volume is typically 50% cedar, 20% hemlock, 20% spruce/balsam, and 10% fir and white pine.
Wood Marketing BC	150 Mile (Cariboo)	Tom Redle T: 296-3414 Barry Redle T: 296-4252	On-going as supply and demand dictates.	On-line bidding processes. On-line information includes sorts by species, size, and volume. Each log separately identified on-line. Enquiry by telephone on individual needs.
Ridley Island Sort Yard	Prince Rupert, BC (Skeena Bulkley)	Des Shearing T: (250) 627-7745 C: (250) 627-9118	Operate all year round	Will try to serve enquiries as they get them. They handle about 60% hemlock balsam, 25% red cedar, 10% spruce and about 5% yellow cedar.
Central Interior Log Sort Ltd.	1033 Pickering Road Prince George	Gordon Bennett or Eron Sarrazin T: (250) 564-2707.	Operating year round.	Contact Gordon and identifying the type and volume of logs required and the log sort will attempt to source for client. The species and volumes vary depending on what is coming into the log yard.

Profitability rises with larger dimension, higher value logs with low input cost relative to output value. In all likelihood it is not expected that the required incremental value could be achieved in the Kispiox without a stronger market for both pulp and saw logs. This problem is exacerbated by the fact that there are relatively few customers in the direct vicinity. Under the current economic and policy climate of low saw log prices and limited market for pulp logs it would be difficult to operate a full-scale sort yard at this time. However, this should not preclude an attempt to work toward a log yard as viability could be improved if underlying conditions change.

5.2.4 Success Requirements

To successfully run a sort yard, the incremental value realized from the logs must be greater than the operating costs incurred in running the sort yard. Logs that have limited or no incremental value by processing at a sort yard should not be directed there. Key requirements include the following:

The ability to handle and market predominantly higher value logs, while minimizing marginal saw logs and pulp logs.
Continuity of supply by linking a major licence(s) to the facility. This will help compensate for market distortions caused by the present tenure system.
Selecting the right location. This is very important, as it will determine the feasibility of buying and selling logs through the yard. If the yard is too far away, hauling costs are too high for both buyers and sellers.
Long-term commitment from participants. This also is critical, as many log yards fail to attract enough activity when prices are good, or when a major buyer/licensee decides to enter the market through direct purchase.
A large pool of buyers is usually needed to support a log yard. In Lumby, there are numerous primary producers and value-added processors who vie for the logs from that yard. This is not the situation in the Kispiox, so the ability to export logs from the region would be necessary.

5.3 Development Issues in the Kispiox

Obtaining more control and access over the timber resource could be facilitated by a log yard, but the current state of forestry economics suggest that for this to succeed, several conditions must be met. The first step is a change in the way the province approaches timber management. In the Kispiox, the government has valid reasons, including community survival, for exploring options . Some solutions include the following:

reallocate timber quota (i.e. increase community access to timber);
find new uses for wood waste;
reduced stumpage;
allow log exports;
provide financial assistance;
get involved in log yard operations; and,
facilitate private ventures such as coops that would operate a log yard

The provincial government is unlikely to favour action on the last three items. Changes to stumpage and log export policies would not require a significant change in forest management practices – similar changes have ccurred elsewhere in the province and could also be done in the Kispiox. The following discussion focuses on improving access to timber and seeking solutions to waste issues, both of which are major barriers to establishing a viable log market in the Kispiox.

5.3.1 Access to Timber

In all cases, a log yard will fail to be viable unless there is a secure source of supply. In the Kispiox, this could be achieved in a number of ways.

Undercut volumes

SCI, the largest licensee in the district and owner of the Carnaby sawmill and Hazelton whole log chipper, has an annual cut of 576,815 cubic metres. The company has failed to achieve its 5-year cut control requirements, and is now approximately 1 million cubic metres behind. This volume could be re-allocated to others such as to increase the Woodlot program.

Transfer of tenure to Northwest BC

Under Section 56 of the Forest Act a transfer of SCI’s forest licence to Northwest BC requires the Forest Minister to reduce the annual allowable cut by 5%. This amounts to an annual cut of approximately 29,000 cubic metres.

The Minister can reinstate this volume to Northwest BC upon the approval of a job creation plan that fulfills the government’s social and economic objectives for the area.

If the Minister decides, or if NWBC fails to satisfy the government’s objectives, the 5% volume could be advertised to others.

Woodlots

The woodlot operators in the district have a strong entrepreneurial ability to source small niche markets for a portion of their log supply.

The undercut volume from SCI’s forest licence or from the 5% licence transfer deduction could be used to increase this successful program.

Scavenging Permits

Individuals should be given authority to scavenge useable trees from forests of low value. These forests would likely contain high pulp content, however within these stands will be trees (cedar, spruce, birch, cottonwood, etc.) having saw log or greater value that could be salvaged by individual entrepreneurs. These logs could be removed from the forests under a salvage tenure/permit, that required the timber to be delivered and hand scaled at a log sort yard.

Small market loggers or woodlot operators are well suited to conduct the scavenging operations, and these individuals should be given as much flexibility as possible.

It is envisioned that scavenging will occur from existing roads requiring minimal costs for access. In some areas costs will be required to reactivate and deactivate the roads. Because harvesting will be low intensity and on a single-tree basis, no silviculture costs would be incurred.

Scavenged timber would assist in meeting the minimum volume requirements for a log yard.

Sustut Timber

Currently the timber in the upper Skeena and Sustut Rivers is included in Supply Block A of the Fort St. James District, part of the Prince George TSA. This area is expensive to operate in because it lacks road access and relies on BC Rail to ship equipment and supplies in and to transports logs out. It is about 290 km distance from the Sustut River to Ft. St. James, the closest community.

On the other hand the Hazeltons are relatively close, at 180 kilometres via the proposed Stewart Omineca resource road.

The proposed Stewart Omineca Resource Road would provide all-weather access into the area providing increased flexibility to manage these forests. The mountain pine bark beetle has been present in the area for well over 15 years, however the populations here are not as rampant as those in the Vanderhoof and Lakes Forest Districts further south.

The Chief Forester increased the annual harvest rate in the Lakes District by 1.5 million cubic metres in May of 2001, and is expected to announce this May a similar increase for the Vanderhoof and Ft. St. James Districts. Further expansions of the bark beetles will put an ever-increasing demand on the milling capacity in the Prince George region. If the bark beetle populations continue to expand to a level where maximum milling capacity is reached, it is very probable, that harvesting operations in the Sustut will be reduced or terminated while Prince George mills focus on infested timber cheaper and closer to their sawmills.

Reductions to harvesting levels in Supply Block A, would reinforce the argument for constructing road access from the west. It is very probable that the Hazeltons and other communities in the Northwest would benefit from significant forest health issues located far to the east.

Given the above scenario, Government could be convinced to advertise an undeveloped timber sale(s) within the Sustut to deal with the current bark beetle population. Hauling revenue from these sales would assist in attracting capital to construct the road.

With a new market based stumpage system, as promised by the Premier, stumpage for the Sustut timber will increase if a new road is constructed. With higher stumpages the economics to continue shipping logs from the northern portions of Supply Block A via BC Rail into Prince George, will be questionable.

Once appurtenancy on all forest licences are removed, logs from the Sustut could be sold to sawmills in the Kispiox and Prince Rupert region. The Hazeltons has the closest sawmills that could manufacture this timber.

5.3.2 Alternative Waste Uses

Cogeneration Facility

The largest impediment to independent power producers has been the resistance of BC Hydro to purchase electricity that is more expensive than that produced by their hydro generators.

The concept of a cogeneration plant in the Hazeltons has been discussed for many years. Sawmills in the Bulkley Valley have attempted to establish a cogeneration plant at Houston for well over 12 years, they have yet to be successful.

However the liberal government has recently indicated that it is prepared to subdivide BC Hydro into 3 entities, one responsible for power generation, another to handle the transmission grid and a third to sell power to commercial and residential customers. The new mandate will be to sell power at market rates, likely at higher rates and closer to costs incurred by independent power producers.

The Kispiox district has an abundant supply of woody material suitable to burn in a cogeneration plant, mostly in the form of pulp logs. Most cogeneration plants utilize waste material as their fuel source. Those using wood waste use shaving and sawdust, a relatively cheap by-product from sawmills.

To be considered economical as a fuel source pulp logs could cost in the range of 5 to 10 dollars per tonne of useable fibre, however another source of cheaper fuel would need to be acquired to blend with the relatively expensive pulp logs so that the overall price is much lower.

In the Hazelton’s there is a very limited amount of residual shavings and sawdust available, however pulp logs could be delivered with transportation cost in the range of 5 to 10 dollars per tonne, excluding any costs for logging, road development and reforestation costs.

Some tropical countries have wood fired cogeneration plants but only where fast-growing trees and other biomass can be cheaply grown close-by and the alternative for generating electricity is at a higher cost (e.g. burning diesel fuel).

⁶^{Development Options}

6.1 Previous Initiatives in the Kispiox

6.1.1 Forest Sector Economic Development Planning

The Action 2000, Beyond 2000, and A Profile of the Value Added Industry in the Upper Skeena, have collectively outlined a number of action steps for building the community’s economic and forest base. The creation of the Upper Skeena Development Society and Hazelton’s designation as a learning community are some notable achievements. There has been some achievement on the forestry side notably through the appointment of a Forestry Initiative Specialist in 1999, but progress has been slow because to date the sector has been out of the control of local hands. While most of the forestry planning recommendations made in the above reports are still valid and in need of implementation, the one recommendation that stands out as being particularly important is the formation of a forestry cooperative that supports small-scale forest enterprises. We believe this is still viable in light of current industry difficulties.

6.1.2 Recap of Koocanusa Presentation

In February 2002, the Kispiox woodlot operators spearheaded a community presentation that outlined the development and operation of the Koocanusa Value Added Cooperative recently established and now operational in the East Kootenays. The presentation by Ken Goldsmith, focused on the goals of the cooperative, the steps they undertook in getting started and outlined the benefits to their members.

The Koocanusa Value Added Coop, a cooperative of individual sawmillers, was formed to provide efficiencies in several areas and to approach the market as “one-force”. The coop is able to acquire larger specialty lumber contracts that “one-offs” could not deliver on. The cooperative purchases all production from sawyer members, which includes the on-grade production for specific orders and the residual dimension lumber.

Without the coop, individual mill operators were required to find their own markets, usually in competition against other small operators, secure appropriate and sufficient logs, arrange delivery of products and to advertise and promote their business. As a member of the coop overhead expenses and capital outlays are reduced, log acquisition is made easier and they have a greater potential to share in the higher financial returns.

For all intents and purposes the value-added wood industry in the East Kootenay remains in its infancy, with the majority of dimension value added producers including both major and small operators, having retained a "2X4 - high volume - commodity" mentality. Coop members now realize that there are substantial opportunities for producing specialty items such as semi-finished window stock, flooring, paneling, door frame material, clear edge strips, export timbers and many others, which produces substantially higher value from each log. A permanent centralized concentration and shipping point in the Cranbrook Industrial Park is currently being developed.

The following steps for establishing a cooperative in the Hazeltons were presented.

Hire a facilitator to coordinate and motivate interested members.
Organize 2 or 3 meetings per month to develop concepts and promote ideas.
Develop a business plan.
Determine what the benefits are to the members of the coop.
Search for a sales persons who can locate and develop niche markets.

6.2 Recommendations

1. Actively pursue a significant change in forest administration and the evaluation of timber.

The impediments to a healthy forest industry in the Kispiox are clear based on the previous 30 years of harvesting:

The government stumpage charge for logs is worth more than what they are worth, based on the financial viability of the local forest industry.
The cost of doing business in the Kispiox throughout a business cycle is more expensive than in other regions of the province.
The shortage of saw logs and increasing pulp content continues to be acerbated when sawmills run during periods of low pulp values.
Capital improvements to sawmills have been sporadic, plants are becoming outdated.
Capital investments in roads have been less than required to sustain harvest levels. Large capital investments in roads are now required to develop new timber sources.
The remaining forests are further from manufacturing plants, are more expensive to develop, grow at higher elevations and have incrementally higher pulp content.

2. Industry, local municipalities, regional district, local businesses, and logging contractors should lobby government as a strong and united force to have the Kispiox District declared a ‘special economic zone’ requiring a fundamental change in how the forests are valued and managed. This should be done through the development of a forestry position paper. The paper would include:

Blending of stumpage rates across the entire District and evaluating right-of-way timber at $0.25/m3. This would average stumpage charges and attempt to recognize the financial costs for handling pulp especially poor pulp markets.
Investigate the opportunity to pool stumpages collected during high lumber and pulp markets into a ‘Kispiox silviculture’ account which would be used to convert poor quality pulp stands into new forests using harvesting and planting as a ‘silviculture’ tool. Such a concept would allow harvesting and silviculture operations to continue during times of poor pulp markets, reducing the impacts of up and down market cycles.
Modifying utilization standards and bucking and waste assessment standards to allow pulp quality timber to be considered waste without financial and cut control penalties.
Approving long term export of surplus whole log chips. Entrepreneurs should be allowed to find and develop chip markets exclusive of the persons holding tenures.
Encouraging market based stumpage to evaluate the true value of the saw logs and pulp logs in the Kispiox district. This system will better reflect the higher than normal harvesting and development costs experienced in the District.
Supporting the concept of ‘scavenger harvesting permits’ that provide long-term tenures to individuals to salvage trees of value from forests of low value. This volume would assist in provided volumes for a log sort yard in the district.

3. Support the construction of the Stewart Omineca Resource Road.

The most significant impact to the Kispiox forest industry will be the construction of the proposed Stewart Omineca Resource Road. This road will provide immediate employment, road access into undeveloped valleys within the district, and will provide the opportunity to shift a portion of the Sustut timber into this region. With a true and unimpeded market based stumpage system, it is highly likely that a portion or all of the Sustut timber would be redirected into this region since transportation costs would be significantly less.

4. Encourage an expansion of the woodlot program in the District.

Greater access to the Crown timber harvest should be sought for those contractors, woodlot operators and First Nations who are committed to the region and have the entrepreneurial spirit to seek out new opportunities and markets. Timber can be made available for this program from the undercut from SCI and the pending transfer of the SCI forest licence to NWBC.

5. Promote the establishment of a log yard to assist woodlot operators and others in securing markets where the highest log values can be obtained.

6. Revisit initiative for a forestry cooperative as outlined in Action 2000. Any progress on the previous-listed initiatives would create more favourable conditions for a cooperative and should be actively pursued.

7. Solicit funds from government sources (e.g. HRDC, CFDC) to hire a facilitator to promote a strong and united community position. The facilitator will develop the position paper outlining the reasons why the Kispiox requires special forestry economic considerations and will identify changes required. Once the facilitator is hired, the following action plan should be carried out in a timely manner.

Appoint or select stakeholder representatives to work in the initiative.
Jointly develop the position paper with key deliverables.
Ensure the above initiatives are communicated directly to the provincial government in Victoria.
Continue lobbying and pressuring government for immediate action.
Monitor benefits realized from changes made.

8. Promote the concept of the ‘Hazelton Basket Case’. Economic and social conditions in the Hazeltons are different than experienced in other parts of BC and these differences need to be marketed to government and others. Branding is one tool and promoting the difficulties under the proposed brand ‘Hazelton Basket Case’ has merit.