Pulp friction builds over U.S. anti-dumping penalties

With duties a threat to Canadian mills and American newspapers, it’s time for Canada to fight back, says Unifor boss

Production at Catalyst’s Crofton mill could be affected by U.S. tariffs | submitted

A single complaint from a paper mill in Washington state is putting Canada’s pulp and paper industry at risk, and it’s time to fight back, says Unifor’s national president.

Jerry Dias warns that more than 1,000 jobs at paper mills in B.C., Newfoundland and Quebec are at risk as a result of American anti-dumping and countervailing tariffs.

In March, the U.S. Department of Commerce imposed a preliminary anti-dumping duty of 22% on Catalyst Paper (TSX:CYT) newsprint exports to the U.S. That’s atop a 6% preliminary countervailing duty that had previously been levied – bringing the total to 28%.

The duties faced by mills are in addition to rising power costs, increasing carbon taxes, a shrinking fibre supply and a decades-long decline in the demand for newsprint and other paper products in an increasingly digitized world.

The duties were imposed as a result of a complaint from North Pacific Paper Co. – owned by the New York hedge fund One Rock Capital Partners – which claims provincial and federal subsidies allow Canadian competitors to sell newsprint into the U.S. at 16% to 65% less than the market should pay.

Several American newspapers have strongly denounced the duties, warning they could put struggling newspapers out of business and even the American Forest and Paper Association opposes them.

The duties target two companies: B.C.’s Catalyst Paper and Kruger Inc.

Catalyst owns paper mills in Crofton, Powell River and Port Alberni. The company employs 1,600 people in B.C. – 1,300 mill workers, and about 300 more at the company’s head office in Richmond and distribution centre in Surrey.

Pulp and paper mills are major economic anchors for communities like Powell River and Port Alberni, where Catalyst Paper accounts for a significant portion of the municipal tax base and high-paying jobs.

Unlike the lumber sector, which has been cushioned somewhat against softwood lumber duties by record-high lumber prices in the U.S., the pulp and paper sector in Canada – and particularly in B.C. – is not nearly as well insulated.

Even before the new duties were levied, Catalyst had been struggling with rising power costs, carbon taxes and a shrinking fibre supply – a result of half of B.C.’s harvestable timber supply being wiped out by the mountain pine beetle and forest fires.

Catalyst currently pays approximately $10 million annually in carbon tax. The $5 per tonne increase, effective April 1, is approximately another $1.5 million annually.

“These tariffs, they’re really unwarranted, and they do come at a challenging time for us,” said Catalyst CEO Ned Dwyer. “We have fibre costs, we have the other taxation issues, and having a duty of this magnitude put on top of us is problematic.

“There is a shortage of economical fibre for paper-making, certainly in coastal B.C. and probably also in central B.C. We’re also challenged as BC Hydro’s largest customer. The hydro increases are a significant impact on our business. The rising carbon tax is not helpful.”

The duties also come at a time when the company has been trying for a fresh start, following a major restructuring.

In 2012, it was forced into creditor protection, and in 2017, the company’s major shareholders assumed $125 million of debt, bought out minority shareholders and took the public company private.

The B.C. government has offered some relief for industry in general by cutting the PST on power sales for business customers in half, and it plans to eliminate it entirely next year. But power is Catalyst’s single largest input, and power prices just rose 3% this year. Carbon taxes also increased 16% this year.

“We’re engaged with the B.C. government on all these topics … and I believe that they are looking hard to see how they can support the industry as a whole,” Dwyer said.

The U.S. is a significant market for the newsprint Catalyst produces. Exports of newsprint from B.C. to the U.S. totalled $258 million in 2016, according to the B.C. government.

This is not the first time Catalyst has been hit with duties. In 2015, the U.S. Commerce Department imposed 11% duties on Catalyst exports, which cost the company $17 million in deposits.

It got the money back after the Commerce Department determined the charges against the company were unwarranted, but it cost the company millions in legal fees.

“It’s expensive to defend yourself,” Dwyer said. “We spent millions last time and millions of dollars again this time defending ourselves.”

Should the Commerce Department decide the allegations of subsidization are valid, the duties could become permanent.

They can be appealed to international trade tribunals, and Canada often wins those challenges. But by the time a ruling comes, it could put some Canadian mills out of business, Dias warned.

“When you’re looking at tariffs over 28%, this is a big deal,” he said. “It’s hard to imagine any company, regardless of industry, surviving with a 30% tariff.”

Despite the warnings of Dias and some Kruger mill workers that mills will close as a result of the duties, Dwyer does not think that will be the case for Catalyst in B.C.

He said the company has been working with the union to reduce costs and diversify its products and markets. It has also been passing on some of the increased costs from the duties to its customers in the U.S.

“We do not contemplate having to close mills,” he said.

Dias thinks provincial and federal governments should cover the cost of the duties for Catalyst and Kruger.

“I think they need to pay the tariff, and then I think they’ve got a lot more skin in the game as we fight to a resolution,” Dias said. “No. 2, they should retaliate.”

He suggests provinces like Quebec should increase the price of electricity exports to the U.S., and B.C. should consider placing restrictions on American thermal coal exports shipped through B.C. ports.

“Christy Clark, I believe, was onto something when she said we’ll stop the trains from cutting through British Columbia carrying coal,” Dias said. “There [are] different things you can do to get their attention.”

But ports are a federal jurisdiction, which is why Clark suggested that, if the federal government did not fight back against softwood lumber duties by restricting coal exports, B.C. should contemplate hitting American thermal coal exports with a $70 per tonne carbon levy.

“Since we started NAFTA [North American Free Trade Agreement], the United States has come after us in softwood lumber, paper, aerospace, aluminum, steel,” Dias said. “We get slapped around and we don’t retaliate, and when you ask, ‘Why aren’t we retaliating?’ everybody’s knees start to knock and they go, ‘Geez, we don’t want to get into that type of game with the United States.’”

Dwyer said his company is not asking for governments to cover the duties, but he would like to see the federal government address the never-ending story of American duties through NAFTA.

“It’s important for the government to stand and demand a change to this process as part of the NAFTA negotiations,” Dwyer said. “We’re just looking for a sustainable solution to this issue.”

nbennett@biv.com

@nbennett_biv