Selective Cuttings

Paper for the people! The influence of proximity to markets on Ontario’s pulp and paper sector

June 5, 2013

Given Canada’s abundant forests, it is easy to think that this resource endowment is the driving factor in the structure of our industry. However, proximity to markets (that is, consumers) is at least as important in determining the shape of the forest sector as proximity to raw materials.

A good example is the Ontario pulp and paper sector. As of the end of 2012, Ontario had 20 active pulp and paper mills owned by 12 different firms. Of these 20 mills, 13 of them are located within 250 km of the city of Toronto, while the remaining 7 are found throughout Northern Ontario and average 1,100 km distance from the provincial capital.

Table displays production and employment at pulp and paper mills in Northern Ontario, versus mills less than 250 km from Toronto, for the year 2012.
  < 250 km to Toronto Northern Ontario
Number of mills 13 7
Number of employees 1,700 2,400
Production (thousand tonnes)
Market pulp 0 1,366
Newsprint 232 749
Printing and writing 0 175
Packaging 1,273 10
Tissues and towels 225 0
Total 1,730 2,300

Consider the types of products produced. Mills in Southern Ontario are located very close to, or indeed at the center of, large populations, and are therefore closest to consumers. As a result, they tend to produce products that are more “value added”: that is, they are highly processed products with generally lower density, which means increased fragility and therefore transportation costs. Furthermore, these products tend to be more specialized resulting in increased benefits from marketing. Indeed, 87% (by mass) of Southern Ontario pulp and paper production is in this category (packaging, tissues and towels).

Within Ontario, 99% of packaging and 100% of tissues and towels are produced within 250 km of Toronto. This makes sense. After all, why put a box in another box in order to ship it to where a customer will take the box out of the box to put something in it to ship it elsewhere? Furthermore, when toilet paper is so delicate and easily damaged, it makes much more sense to produce the pulp that goes into it close to the forest, and then ship the pulp to where consumers are, and transform it into toilet paper close to the market. Which is to say, if a product is likely to be consumed directly by consumers, the greater the market advantage to producing it close to major population centres.

In Northern Ontario, by contrast, 99% of production is in the “commodity” category (market pulp, newsprint, and printing and writing papers). These products have relatively high density and as a result are fairly durable and have relatively low transportation costs. These products also have relatively little product diversity. Indeed, their relative indistinguishability from company to company is an important selling feature.

While Ontario pulp and paper has been used in this example, the case can be generalized internationally. In general, value-added products (forest products or no) can be made much more profitably close to consumers. As a result, parts of the world with abundant raw materials but relatively small populations (borders notwithstanding) tend to ship raw materials and commodities to population centres to be manufactured into finished products.