Dawson Forest

Table of Contents

Problem        1

Causes        1

Alternatives and Options        3

Recommendation        5

Implementation        5

Problem

Tactical Issues

1. Biomass Conversion Capital Improvement Project

Jon needs to decide whether he should continue or cancel this project at his central BC mill. Currently they are over budget by $1.2 million and 3 months behind schedule. Without this project, they would have to pay carbon tax.

1. Residual Biomass

Whether they continue with the Biomass Conversion project or not, Jon needs to decide what he wants to do with the residual biomass. If they choose to continue with the project, he will need to dispose of 50% of the biomass compared to all of it if the project is cancelled.  

Strategic Issues

1. High Operating Costs

Dawson Forest Products (DFP) needs to lower their operating costs and increase their profits.

Causes

Technology

The drying stage was the longest and one of the most critical stages in the production process. DFP’s current kilns are 10 years into the 20 – 30 year life cycle and already had dated technology. However, there are five areas that Jon could improve energy efficiencies in their current kilns: heat exchangers, fan efficiency, uniformity of drying environment, uniformity of raw material, and process control.

By converting to a thermal energy system with the Biomass Conversion Project, they would reduce the use of natural gas, greenhouse gas (GHG) emissions, and number of transport vehicles required. The charge times and product quality would improve. They would also be able to use their residual material to fuel the new kilns.

Lumber Supply

BC’s currently facing shrinking timber supplies as approximately 60 percent of their timber was wiped out due to the mountain pine beetle and the annual allowable cut was reduced by 20 percent. As a result, the cost of logs has gone up and the long term supply of residual byproducts was uncertain.

Lumber Demand

The two key markets for exports, US and China, have declined lumber demands due to the slowdown in the housing market. US were the biggest market for BC softwood with 56 percent of the exports. Japan on the other hand, is experiencing an increase in housing demand.

The largest market for wood pellet products was Europe due to their energy policies. It is also predicted that Asian countries, such as Korea and Japan, were expected to have increased demand for pellets. Although in the early stages, Jon was approached by a pellet company to co-locate a pellet manufacturing operation in their central BC mill.

Natural Gas

Although wood fuels are more stable than natural gas, natural gas prices have had historically low prices and were predicted to bottom out below $1. DFP’s current contract rate is $1.30 per million cubic feet, making the annual cost of natural gas $612,470. If the analysts are correct and prices bottom out at around $1, their annual natural gas cost would be $471,131, which would be a $141,339 savings.

Carbon tax is currently frozen at $30/tonne and set for review in 2018. According to analysts, this was predicted to go up $10/tonne each year starting 2018 -2050.

Budget

The $35 million capital improvement budget which included the Biomass Conversion Project (estimated cost of $10.457 million) was over budget by $6.5 million with several projects still in progress, $1.2 of which was for the biomass project. Slowdowns/shutdowns were common in this industry, but the project assumed a steady production level which may have inflated the payback period and NPV given the current market situation.

Alternatives and Options

1. Negotiate contract with Alstom

STM should sole-source and negotiate a contract with Altom.

Pro

• Wood fuel more stable than gas
• Reduce natural gas and GHG emissions, improve charge time and quality

Con

• Chance of more delays and budget increases
• Shrinking timber supply

1. Negotiate contract with Bombardier

STM should sole-source and negotiate a contract with Bombardier.