PRESENTATIONTO THE COMMERCIAL & INDUSTRIAL HEMP

SYMPOSIUM II

CANADIAN PULP MARKETSA DOMESTIC AND INTERNATIONAL

REVIEW AND OUTLOOK

Keith McKellarForest Industries & Building Products BranchIndustry CanadaFebruary 19, 1998

1GOOD MORNING LADIES AND GENTLEMEN

SLIDE 1

I WANT TO TALK TO YOU ABOUT THE CANADIAN PULP AND PAPERINDUSTRY, ITS FIBRE SUPPLY, ITS MARKETS, THE SPECIALTY PULP ANDPAPER INDUSTRY, AND SOME OBSERVATIONS BY HEMP SPECIALISTS.

HEMP FIBRE IS AN INTERESTING MATERIAL WHICH COMPETES IN AMARKET HAVING A NUMBER OF OTHER FIBRE TYPES SUCH ASRECYCLED WASTE PAPER, NEW WOOD PULP FROM PLANTATIONS,WASTE WOOD AND ROUNDWOOD, FIBRES FROM AGRICULTURALWASTE AND SYNTHETIC FIBRES. COMPETITION IS A KEY ISSUE FACINGTHIS INDUSTRY.

SUCCESSFUL PULP AND PAPER COMMERCIALIZATION ON A LARGESCALE IN CANADA DEPENDS HEAVILY ON THE DEVELOPMENT OF MADEIN CANADA OR NORTH AMERICA TECHNOLOGY AND EXPERTISE, ANDMARKET ACCEPTANCE BY FINAL USERS.

SLIDE 2

FIRST, I WOULD LIKE TO TAKE THIS OPPORTUNITY TO TALK A BIT ABOUTINDUSTRY CANADA.

INDUSTRY CANADA IS A FEDERAL GOVERNMENT DEPARTMENT HAVING3 MAJOR AREAS

MICROECONOMIC POLICY INCLUDES THINGS SUCH AS

DEVELOPMENT OF GOVERNMENT WIDE POLICIES ON SCIENCEAND TECHNOLOGY,

AND OVERHAUL OF TELECOMMUNICATIONS POLICY.

MARKET PLACE RULES AND SERVICES EACH YEAR INVOLVES

INCORPORATING ABOUT 80,000 NEW BUSINESSES,

PROCESSING 65,000 INTELLECTUAL PROPERTY APPLICATIONS

2UNDERTAKING THOUSANDS OF COMPETITION INVESTIGATIONS,AND CONSUMER PRODUCT QUALITY INSPECTIONS.

FOR INDUSTRY SECTOR DEVELOPMENT, THE DEPARTMENT HAS AMAJOR ROLE IN TRADE AND SPECIALIZED PROGRAMS IN TOURISM ANDTECHNOLOGY.

THE DEPARTMENT ALSO HAS A STRONG FOCUS ON PROVIDINGINFORMATION TO THE BUSINESS COMMUNITY. INDUSTRY CANADA HASTHE STRATEGIS WEB SITE WHICH CONTAINS OVER 400,000 DOCUMENTSWHICH ARE ACCESSIBLE DAY OR NIGHT THROUGH THE INTERNET. STRATEGIS IS ALSO HOT LINKED TO INTERNATIONAL SITES ONPARTICULAR ISSUES, AND HAS VARIOUS DIRECTORIES.

THIS AFTERNOON AT 2:30 IN ROOM NUMBER 7 THERE WILL BE ADEMONSTRATION OF STRATEGIS AND I INVITE YOU TO COME.

THE FOREST INDUSTRIES AND BUILDING PRODUCTS BRANCH IS A 25PERSON SECTOR BRANCH WHICH FOCUSES ON FOREST INDUSTRYISSUES. I AM LOCATED IN VANCOUVER AND ONE OF MY MAIN ROLESHAS BEEN DEALING WITH THE SMALL BUSINESS COMMUNITY ANDRECENTLY IMPROVING MARKET ACCESS IN JAPAN FOR CANADIANWOOD PRODUCTS.

SLIDE 3

CANADA DOES NOT CURRENTLY USE HEMP AS A RAW MATERIAL FORPULP AND PAPER PRODUCTION EXCEPT ON A RELATIVELY TINY SCALE.

OVERALL THE AMOUNT OF INFORMATION AVAILABLE FROM CANADIANOR US SOURCES IS VERY LIMITED.

THE USE OF HEMP BY THE WORLD PULP AND PAPER INDUSTRY ISFAIRLY SMALL.

I EXPECT THAT SOME OF THE TECHNOLOGY USED IN THEINDUSTRIALIZED WORLD TO PROCESS HEMP COULD BE VERYSPECIALIZED AND EXPENSIVE TO DEVELOP, AND CONSEQUENTLYCOMPANIES WOULD BE EXPECTED TO BE QUITE SECRETIVE.

OTHER SPEAKERS ARE EXPECTED TO TALK ABOUT EXPERIENCE WITHHEMP IN EUROPE AND ELSEWHERE, AND I LOOK FORWARD TOLEARNING MORE.

3SLIDE 4

CONCERNING WORLD FIBRE SUPPLY

FROM A WORLD PERSPECTIVE, FUELWOOD IS THE LARGEST USE FORTIMBER, ACCOUNTING FOR ABOUT 55% OF TOTAL CONSUMPTION.

FOR MANY YEARS FORECASTERS HAVE ANTICIPATED SEVERESHORTAGES OF TIMBER ON A WORLDWIDE BASIS. THIS HAS CERTAINLYBEEN THE CASE ON A REGIONAL BASIS AND FOR SPECIALIZED SOLIDWOOD PRODUCTS LIKE HARDWOOD PANELING.

THE HARVEST IN NORTH AMERICA HAS FALLEN BY OVER 75 MILLIONCUBIC METRES SINCE 1985, DUE MAINLY TO US FOREST SERVICE ANDOTHER LANDS BEING WITHDRAWN TO PROVIDE FOR THE SPOTTED OWLFOR EXAMPLE.

HOWEVER IN A MARKET ECONOMY, BUSINESS PEOPLE REACT, AND IHAVE HEARD THAT ON SOME PRIVATE LANDS IN OREGON, DOUGLAS FIRSAWLOG ROTATIONS IN THE LINE OF 20 YEARS ARE BEING FOUND TOBE VERY COMMERCIAL, WHICH TREMENDOUSLY INCREASES THESUPPLY OF WOOD FIBRE.

ALSO IN THE WESTERN UNITED STATES, INCREASED INVESTMENT ISOCCURRING IN FAST GROWING PLANTATIONS OF HYBRID POPLAR,WITH 5 TO 6 YEAR ROTATIONS, USING MARGINAL FARM LAND.

THE HARVEST IN THE RUSSIAN FAR EAST HAS FALLEN DUE TO THECOLLAPSE IN THE ECONOMY AND INFRASTRUCTURE. SOME SAY THATIT WILL BE A LONG TIME BEFORE RUSSIA RETURNS IN FULL FORCE TOTHE WORLD MARKET.

HOWEVER THERE REMAINS A HUGE RESOURCE IN RUSSIA WHICHIS RELATIVELY UNTOUCHED, AND I HAVE HEARD THAT JAPANESEINVESTMENT IN THE REGION IS GROWING.

IN SOUTH EAST ASIA, PLANTATIONS ARE EXPANDING BASED ON SHORTROTATION HARDWOODS, ESPECIALLY EUCALYPTUS. THE RESULTINGSHORT FIBRED PULP IS VERY INEXPENSIVE TO PRODUCE, ANDCONSEQUENTLY VERY COMPETITIVE WITH HARDWOOD PULPPRODUCERS IN OTHER REGIONS. EUCALYPTUS CAN ALSO BE USED INPLACE OF SOME OR ALL SOFTWOODS IN SOME APPLICATIONS.

4SO THE WORLD ECONOMY HAS A NUMBER OF WAYS IT CAN REACT IFTRADITIONAL SOFTWOOD SOURCES BECOME TIGHTER.

IN ADDITION IT IS REASONABLE TO EXPECT INCREASED RECYCLING OFWASTE PAPER, NEW TECHNOLOGIES, NEW PRODUCTS ANDSUBSTITUTION.

SLIDE 5

AS YOU CAN SEE FROM THIS SLIDE, THE CURRENT SUPPLY OF FIBREFOR PAPER IS ABOUT 45% FROM RECYCLING.

FORECASTS INDICATE THAT RECYCLING IS GOING TOPROGRESSIVELY INCREASE ITS MARKET SHARE OVER THE NEXT 5YEARS TOWARD ABOUT 48%, OR ALMOST HALF OF ALL WORLDPAPER AND PAPERBOARD.

RECYCLED WASTE PAPER COULD BE A MAJOR COMPETITOR FOR HEMPIF HEMP TARGETS MARKETS BEING SERVED BY RECYCLED MATERIAL.

SLIDE 6

WORLD PAPER AND PAPERBOARD CONSUMPTION IS DOMINATED BY:

PRINTING AND WRITING PAPERS, SUCH AS COPY PAPER, FORMS,AND BOOK PAPER.

AND OTHER PAPERBOARD SUCH AS CARTONS, BOXES,CONTAINERS FOR DRINKS, ETC.

IN 1997 CANADA REPRESENTED ONLY 20 MILLION TONNES OF PAPERAND PAPERBOARD PRODUCTION OR ABOUT 7% OF THE WORLDMARKET.

CANADA ALSO PRODUCED ABOUT 10 MILLION TONNES OF MARKETPULP, WHICH IS USED BY FOREIGN PRODUCERS OF PAPERPRODUCTS TO PRODUCE THE FINAL PRODUCT AFTER BLENDINGTHE MARKET PULP WITH OTHER PULPS TO ACHIEVE PARTICULARTECHNICAL CHARACTERISTICS.

SO CANADA HAS A RELATIVELY SMALL MARKET SHARE AND IS MORE OFA PRICE TAKER ACCORDING TO WORLD SUPPLY AND DEMAND.

5SLIDE 7

THE OUTLOOK IS FOR RAPID GROWTH IN PRINTING AND WRITINGPAPERS AND FOR PACKAGING.

BOTH PRODUCTS USUALLY USE A BLEND OF HARDWOOD ANDSOFTWOOD PULPS.

SOFTWOOD PULP HAS LONGER FIBRES AND PROVIDES STRENGTH.HARDWOOD IS SHORTER FIBRED AND FILLS THE GAPS BETWEEN THESOFTWOOD TO PROVIDE A SMOOTHER SURFACE WHICH IS MOREATTRACTIVE WHEN PRINTED ON.

BOTH OF THESE KEY GROWTH FINAL PRODUCT AREAS ARE FAIRLYWELL SATISFIED WITH THE PRODUCTS BEING USED, AND THE KEYFOCUS OF CUSTOMERS IS ON PAYING THE LOWEST POSSIBLE PRICE.

SLIDE 8

THE OUTLOOK FOR GROWTH IN CANADA IS RELATIVELY SMALL.

THE MAJOR GROWTH AREA IS THE FAR EAST, WHERE THERE TENDS TOBE TWO MARKETS FOR PULP AND PAPER PRODUCTS.

MANUFACTURERS OF PRODUCTS FOR EXPORT TO THEINDUSTRIALIZED WORLD IN NORTH AMERICA AND EUROPEGENERALLY HAVE TO HAVE PACKAGING AND PAPERS WHICHMEET EXPORT MARKET STANDARDS. CONSEQUENTLY IS FOR AHIGH QUALITY FIBRE.

BUT PRODUCERS WHICH SERVE DOMESTIC ASIAN MARKETS OFTENFIND THAT CUSTOMERS HAVE LOWER EXPECTATIONS RESPECTINGPACKAGING AND PAPER QUALITY.

CONSEQUENTLY LOCAL ASIAN MARKETS ACCEPT LOWER GRADESOF PAPER AND PAPERBOARD, WHICH CAN BE MET WITH POORERQUALITY FIBRE, POSSIBLY USING MORE SHORT FIBREDHARDWOODS AND RECYCLED PAPER.

THERE HAS BEEN A DRAMATIC EXPANSION OF WOOD SUPPLY INWESTERN EUROPE AS PLANTATIONS OF VARIOUS SPECIESESTABLISHED AFTER WORLD WAR 2 MATURE.

6SLIDE 9

TYPICALLY OTHER MATERIALS ARE USED TO PRODUCE PULP ANDPAPER WHEN VERY SPECIALIZED CHARACTERISTICS ARE WANTED, ORWHEN SMALL WOODEN LOGS OR WOOD WASTE ARE NOT AVAILABLEAND CANNOT BE IMPORTED.

OTHER FIBRE PULP IS PRODUCED IN SUBSTANTIAL VOLUME.

THE MOST SIGNIFICANT PRODUCER IS CHINA WHICH CONTROLSIMPORTS, AND HAS LARGE VOLUMES OF AGRICULTURAL WASTES, ANDA POTENTIALLY HUGE DEMAND.

ALSO, IN CHINA A SMALL NUMBER OF VERY LARGE PULP AND PAPERPRODUCERS USING QUITE OLD TECHNOLOGY, ALSO PROVIDE A WIDERANGE OF SERVICES TO THE COMMUNITY, INCLUDING HOSPITALS,NURSERIES AND OLD AGE HOMES, AND ARE PROTECTED FROMCOMPETITION BY IMPORTS FOR THIS REASON.

CHINA ALSO HAS SEVERAL THOUSAND SMALL MILLS ALTHOUGH MANYARE BEING SHUT.

RAW MATERIAL USED INCLUDES BAGGASSE, STRAW AND BAMBOO.

STATISTICS ARE DIFFICULT TO COME BY, BUT MANFRED JUDT IN ANARTICLE PUBLISHED IN 1994 WROTE THAT LESS THAN 30,000 TONNESOF PULP WERE MADE FROM HEMP IN 1992.

SLIDE 10

IT IS INTERESTING TO LEARN FROM THE CANADIAN FORESTRY SERVICETHAT BASED ON PROVINCIAL FIGURES, THERE IS SUBSTANTIALUNUTILIZED ANNUAL CUT IN CANADA.

MUCH OF THIS AVAILABLE MATERIAL IS IN QUEBEC, MANITOBA, ANDSASKATCHEWAN, QUITE A BIT OF IT BEING HARDWOODS OR SMALLSOFTWOODS, SOME IN QUITE ISOLATED LOCATIONS.

SLIDE 11

LOOKING AT PULP AND PAPER, THE MAJOR PERCENTAGE OFPRODUCTION COMES FROM SAWMILL RESIDUES, CHIPS ANDRECOVERED PAPER.

7IF YOU REMOVE MARKET PULP FROM THE ABOVE CALCULATION, THEPERCENTAGE OF WASTE PAPER OF THE MATERIAL ACTUALLY USED INPRODUCING PAPER AND PAPER BOARD INCREASES TOWARD 25%.

CANADA ACTUALLY IMPORTS OVER 2 MILLION TONNES OF RECYCLABLEPAPER, REPRESENTING ABOUT 50% OF THIS MATERIAL USED INCANADA.

FOR SOUND SOFTWOOD LOGS, THE MOST PROFITABLE USE IS TOPROCESS THEM INTO SOLID WOOD PRODUCTS LIKE LUMBER.

AS A CONSEQUENCE THE ROUNDWOOD USED BY THE PULP AND PAPERINDUSTRY IS GENERALLY MATERIAL THAT DOESNT MAKE SENSE TOPROCESS INTO LUMBER, BUT MUST BE HAULED OUT OF THE FORESTBECAUSE OF PROVINCIAL REGULATIONS.

SLIDE 12

AS YOU CAN SEE, THE MAJOR PRODUCT PRODUCED IN WESTERNCANADA IS MARKET PULP.

BC MARKET PULP IS SOLD TO PAPERMILLS AROUND THE WORLDAND GENERALLY USED AS ONE OF SEVERAL PULPS BLENDED TOMAKE A FINAL PRODUCT.

SO BC IS A PRODUCER OF RAW MATERIAL FOR PAPERMILLS IN OTHERCOUNTRIES. THE FOREIGN PAPERMILL DECIDES WHETHER TO BUY ITSPULP FROM BC OR FROM SOME OTHER SUPPLIER.

ONE REASON THAT BC IS A MAJOR PRODUCER OF MARKET PULP ISTHAT OTHER COUNTRIES HAVE TARIFFS DESIGNEDTO PROTECT THEIRPAPER INDUSTRY.

IN CHINA THE TARIFF IS 15% ON NEWSPRINT BUT ONLY 1% OR 2%ON MARKET PULP

WESTERN CANADIAN PULP AND PAPER MILLS ARE TYPICALLY VERYLARGE OPERATIONS PRODUCING 500 TO 1000 TONNES PER DAY ON ACONTINUOUS BASIS.

8WITH SUCH LARGE FACILITIES THE TECHNOLOGY, EQUIPMENTAND EXPERTISE ARE DEDICATED TO ACHIEVING TIGHTLYCONTROLLED AND RELATIVELY NARROW OBJECTIVES DAY AFTERDAY.

THE PLANTS ARE DESIGNED TO PRODUCE A HIGH QUALITYPRODUCT AT LOWEST POSSIBLE COST.

THE WESTERN CANADIAN INDUSTRY IS NOT COMPRISED OF FACILITIESWHICH REGULARLY EXPERIMENT WITH A WIDE RANGE OF MAJORPROCESS ALTERNATIVES LIKE NEW FIBRE TYPES.

HOWEVER OVER THE LONG RUN, THE INDUSTRY DOES INNOVATE,USING DIFFERENT RAW MATERIALS AND TECHNOLOGIES AS THEYBECOME COMMERCIAL.

BUT CHANGE TYPICALLY OCCURS ONLY AFTER THE TECHNOLOGYOR NEW INNOVATION IS WELL PROVEN, SUCH AS BY LAB ANDPILOT PLANT WORK, OR BY USE ELSEWHERE ON A LARGECOMMERCIAL SCALE.

SLIDE 13

CANADA DOES HAVE A NUMBER OF SPECIALTY PULP AND PAPER MILLS. FOR EXAMPLE THE PORT ALICE MILL IS A SULPHITE MILL WHICHPRODUCES SPECIALTY PULP THAT IS USED IN

- CIGARETTE FILTERS AND PAPER- RAYON- PHARMACEUTICALS- COSMETICS- ARTIFICIAL LEATHER- PLASTICS- SPONGES

ROLLAND USES RECYCLED COTTON FROM CLOTHING FOR CURRENCYAND LEGAL PAPERS

THE PLANT IN VULCAN IS A STRAW PROCESSOR. IT IS AN EXAMPLE OFHOW HEMP PULPING COULD START IN CANADA WITH A SMALLEXPERIMENTAL/PRODUCTION PLANT. COSTS FOR SUCH A SMALL PLANTWOULD PROBABLY BE BETWEEN $10 MILLION AND $50 MILLION.

9AN INTERESTING EXAMPLE OF A MARKET PULP MILL WHICH HAS ANUNUSUAL PRODUCT IS HARMAC,

HARMAC TAKES WESTERN RED CEDAR WOOD WASTE ANDPROCESSES IT INTO PULPS THAT HAVE FIBRES LIKE FLATSTRANDS AND SO ARE NOT COARSE LIKE DOUGLAS FIR PULPSFOR EXAMPLE. BECAUSE OF THIS STRAND QUALITY, CEDARPULPS ARE SOLD TO SPECIALTY PRODUCERS WHICHMANUFACTURE SURGICAL GOWNS AND MATERIALS, FOREXAMPLE. THIS SORT OF MATERIAL COMPETES DIRECTLY WITHINDUSTRIAL HEMP IN SOME OF ITS FINAL MARKETS.

SLIDE 14

A RECENT ARTICLE BY THEODORE WIRTZ SAYS THAT THE SPECIALTYPAPER SECTOR IS RELATIVELY SMALL.

IN NORTH AMERICA IT HAS AN ESTIMATED PRODUCTION OFABOUT 125,000 TO 150,000 TONNES PER YEAR, WHICH IS ONLY ATINY PORTION OF THE 95 MILLION TONNE PER YEAR NORTHAMERICAN PAPER AND PAPERBOARD PRODUCTION.

THE SPECIALTY PAPER INDUSTRY IN NORTH AMERICA BEGAN IN THE1930S WHEN A COMPANY BEGAN TO FORM PAPER FROM MANILA HEMPOR ABACA FIBRE.

ABACA HAS APPARENTLY UNIQUE PROPERTIES MAKING IT IDEALFOR TEA BAGS AND MEAT PRODUCTS AS IT IS 6 TO 8 MM LONGAND 2 OR 3 TIMES STRONGER THAN WOOD FIBRE.

FROM THIS GREW THE SPECIALTY PAPER INDUSTRY WHICH ALSOMAKES FILTERS, WHICH ACCOUNTS FOR ABOUT 50% OF PRODUCTION,AND VARIOUS OTHER PRODUCTS SUCH MATERIALS FOR APPAREL,BATTERIES, THERMAL BARRIERS AND AUTO EXHAUSTS.

MEDICAL USES INCLUDE OPERATING ROOM GOWNS ANDSTERILIZATION WRAPS AND OVERWRAPS.

THIS INDUSTRY USES A RANGE OF MATERIALS UP TO 100% SYNTHETIC.

FIBRES ARE GENERALLY VERY LONG, UP TO 1 INCH IN LENGTH.

10

DILUTION WITH WATER IS TYPICALLY 100 TIMES THAT OF STANDARDPAPER MAKERS, AND MACHINERY AND TECHNOLOGY IS VERYSPECIALIZED.

HOWEVER PRICES FOR THESE NICHE MARKET PAPER PRODUCTS ARE 3TO 5 TIMES THAT OF COMMODITY NEWSPRINT, ETC.

THIS IS A VERY SMALL INDUSTRY COMPRISED OF COMPANIES THAT ARENOT HOUSEHOLD NAMES. THEY HAVE ESTABLISHED SOURCES OFSUPPLY BUT MAY BE OPEN TO NEW SUPPLIERS.

SLIDE 15

RECENTLY DOMTAR AND THE UNIVERSITY OF TORONTO FACULTY OFFORESTRY. HAVE REPORTED ON HEMP FIBRE EXAMINATION ANDPULPING TESTS. HERE ARE SOME OF THE RESULTS.

AS EXPECTED, THE BAST FIBRE CAN BE VERY LONG, AN AVERAGEOF 8 TIMES THE LENGTH OF SOFTWOOD, OR ABOUT 1 INCH INLENGTH.

MANFRED JUDT WROTE IN HIS ARTICLE THAT BAST FIBRES HAVETO BE SHORTENED USING SPECIALIZED EQUIPMENT BEFORETHEY CAN BE USED ON EXISTING PAPER MACHINES, AND THATCONVENTIONAL MILLS DO NOT HAVE THIS SPECIALIZEDEQUIPMENT.

HEMP FIBRES ALSO VARY IN DIAMETER, CAN BE IRREGULAR INSHAPE, AND THIS AFFECTS FIBRE PERFORMANCE.

THE CORE AND PITH HOWEVER ARE VERY SHORT, OFTEN MUCHSHORTER THAN THE STANDARD FOR HARDWOOD FIBRES.

A MEASURE OF THE UNCERTAINTY ABOUT HOW TO PROCESS HEMPAND THE NEED FOR FURTHER RESEARCH IS INDICATED BY THISUNIVERSITY OF TORONTO STUDY, WHERE SOME 160 PULP SAMPLESWERE PREPARED USING DIFFERENT TIMES AND TEMPERATURES ANDTHE YIELD AND RESIDUAL LIGNIN MEASURED.

11

THE FACT THAT THIS TYPE OF WORK WAS NECESSARY INDICATESTHAT THERE IS A REAL LACK OF INFORMATION ON HEMPPULPING. FOR EXAMPLE AFTER 160 SAMPLES THE CONCLUSIONWAS THAT MORE TESTING IS NECESSARY USING A DIFFERENTCONCENTRATION OF CHEMICALS.

IT IS TRUE OF COURSE THAT PULPING OF HEMP COULD BE DONE RIGHTNOW, BUT THERE WOULD BE TECHNICAL PROBLEMS WITH THEPROCESS AND THE PRODUCT WHICH COULD MAKE IT NOTCOMMERCIALLY VIABLE.

SLIDE 16

THIS SLIDE SHOWS THAT THE LONG FIBRED AND VERY DESIREABLEBAST ACCOUNTED FOR ONLY ABOUT 20% OF THE RECENT UNIVERSITYOF TORONTO STUDY.

I GATHER THAT FOR SOME TYPES OF HEMP, THE PERCENTAGE OFBAST CAN INCREASE TOWARD ABOUT 30%.

ACCORDING TO ERNIE SMALL WHO LED AN AGRICULTURE CANADAPROGRAM IN THE 1970S WHICH GREW AND EXAMINED SEVERALHUNDRED VARIETIES OF HEMP, THERE IS TREMENDOUS GENETICVARIATION BETWEEN VARIOUS TYPES OF HEMP.

HE ADVISES THAT HEMP TYPES GROWN FOR FIBER GENERALLYHAVE HOLLOW STEMS WHILE THOSE GROWN FOR OILSEEDS ORTHC HAVE SOLID STEMS.

SELECTION OF THE RIGHT VARIETY FOR THE ENVIRONMENT ANDFINAL PRODUCT BEING SOUGHT IS VERY CRITICAL.

SLIDE 17

I WOULD LIKE TO NOW BRIEFLY TALK A LITTLE ABOUT SOME PUBLISHEDREPORTS ON THE PULPING AND COMMERCIAL USE OF HEMP OUTSIDEOF CANADA.

IN A 1994 PUBLICATION, VAN ROEKEL ADVISES THAT THERE IS NOSIGNIFICANT PRODUCTION OF 100% TRUE HEMP PAPER.

HEMP WAS BEING PROCESSED BY 23 PAPER MILLS INTO VARIOUSPRODUCTS.

12

IN THE DEVELOPING WORLD, HEMP WAS USED TO PRODUCE VARIOUSMODERATE GRADES OF PAPER.

FOR THE 10 PAPER MILLS IN THE WESTERN WORLD, HEMP WAS USEDTO PRODUCE SPECIALTY PAPERS LIKE CIGARETTE PAPER, FILTERPAPER, COFFEE FILTERS, TEA BAGS, SPECIALTY NON-WOVENS,INSULATION PAPERS, GREASEPROOF PAPERS AND SPECIALTY ARTPAPERS.

ACCORDING TO THIS SOURCE THESE PRODUCTS CAN ONLY BEPRODUCED FROM SPECIAL FIBRES LIKE HEMP, FLAX, COTTONAND OTHER NON-WOOD FIBRES.

THE AVERAGE HEMP PULP MILL WAS SAID TO PRODUCE ABOUT 5,000TONS PER YEAR.

THE TYPICAL CANADIAN MILL WOULD PRODUCE THAT IN ABOUT AWEEK, BUT THE HEMP PULP MILL CAN SURVIVE BECAUSE ITCHARGES ABOUT $US2500 VERSUS $US400 PER TON FOR MARKETPULP.

THESE MILLS SOUND LIKE THE SPECIALTY PAPER MILLS THAT IREFERRED TO EARLIER. IN SUCH A CASE THE MARKET IS VERY SMALLAND SPECIALIZED.

MOST OF THESE WESTERN MILLS JUST PROCESS THE BAST.

ACCORDING TO MANFRED JUDT, PULPING OF THE WHOLE STEMINCLUDING THE BAST AND CORE, RESULTS IN A PULP COMPARABLE TOGOOD DEINKED WASTEPAPER STOCK AND DRAINS VERY SLOWLY ONTHE PAPER MACHINE, REDUCING PAPER MACHINE PRODUCTION BY 2OR 3 TIMES.

DAVID MARCUS WROTE THAT A NETHERLANDS STUDY CONCLUDEDTHAT IT WAS BETTER TO PULP THE BAST AND CORE SEPARATELY.

SLIDE 18

SO WHAT ABOUT OTHER EXISTING AGRICULTURAL FIBRES?

AS YOU CAN SEE FROM THIS SLIDE, IN THE UNITED STATES THERE AREAVAILABLE HUGE VOLUMES OF CEREAL STRAW, CORN AND SORGHUMMATERIAL.

13

SIGNIFICANT WORK HAS BEEN UNDERTAKEN IN CANADA ON:

1) PULPING OF WHEAT STRAW BY PAPRICAN, AND

2) FLAX PULPING SPONSORED BY THE CANADIAN FORESTRYSERVICE

SLIDE 19

HEMP BAST FIBRE IS ABOUT ONE INCH LONG ACCORDING TO THEUNIVERSITY OF TORONTO STUDY, BUT SO IS FLAX STRAW.

FLAX STRAW

FLAX STRAW IS ANOTHER BAST PLANT WHICH HAS A HIGH QUALITYFIBRE.

FLAX CAN BE GROWN TO PRODUCE LINEN, BUT IN CANADA IT IS GROWNMAINLY FOR ITS SEED WHICH IS USED TO PRODUCE LINSEED OIL.

FLAX STRAW APPARENTLY DOES NOT DECAY EASILY, SO THETRADITIONAL DISPOSAL METHOD HAS BEEN TO BURN IT. TOTALVOLUME AVAILABLE IS IN THE RANGE OF 1 MILLION TONNES A YEAR.

AS KEN DOMIER SAY YESTERDAY, THERE ARE TWO SMALL MOBILEOPERATIONS WHICH VISIT FLAX FARMS IN MANITOBA ANDSASKATCHEWAN

THEY COLLECT THE FLAX STRAW AND ON A YEAR ROUND BASISSEPARATE SOME 60% OF THE FIBRE, BALE AND SHIP IT TO THEEASTERN UNITED STATES WHERE TWO PULP AND PAPER MILLSPROCESS IT INTO CIGARETTE, DOCUMENT AND BIBLE PAPER.

TOTAL CONSUMPTION BY THESE TWO OPERATIONS IS IN THE RANGE OF200,000 TONNES PER YEAR, SO ABOUT 800,000 TONNES REMAINS ADISPOSAL PROBLEM.

CANADIAN FORESTRY SERVICE SPONSORED AN INVESTIGATION OFFLAX.

A POTASSIUM BASED PULPING SYSTEM WAS DEVELOPED, WITHTHE BLACK LIQUOR BEING PROCESSED INTO FERTILIZER.

14

UNDER THIS PROJECT, FLAX FIBRE WAS MIXED WITH VARIOUSPERCENTAGES OF STRAW AND RECYCLED PULP TO PRODUCE PAPER.

SOME OF THIS PAPER WAS RUN SUCCESSFULLY BY COMMERCIALPRINTING PLANTS.

THE STUDY CONCLUDED THAT SEVERAL SMALL MILLS OF 40 TONNESPER DAY AND EMPLOYING 30 PEOPLE EACH COULD BE ESTABLISHEDACROSS THE PRAIRIES.

NOW TURNING TO WHEAT STRAW

WHEAT STRAW IS SHORTER FIBRED THAN HEMP BAST, SO IT COMPETESWITH HARDWOODS, WHICH ARE IN GOOD SUPPLY.

BEING SHORT FIBRED, IT COULD ALSO COMPETE WITH HEMPCORE.

SOME 24 MILLION TONNES OF WHEAT STRAW ARE PRODUCED INCANADA EACH YEAR, AND SOME IS USED FOR LIVESTOCK BEDDING,SOME IS BURNT, AND SOME IS CHOPPED UP AND SPREAD ON THEFIELDS. BUT SUPPLY IS HUGE.

THE ANNUAL HARVEST MEANS THAT STORAGE IS REQUIRED, ANDTHERE IS SOME EVIDENCE THAT THE MATERIAL AND RESULTING FIBREQUALITY IS AFFECTED BY HOW IT IS STORED, AS IS THE CASE WITHWOOD FIBRE.

WHEAT STRAW FIBRES ARE SHORT AND SLENDER, AND PRODUCEPAPER WITH HIGH TENSILE STRENGTH, GOOD CLOSED AND SMOOTHSURFACE AND GOOD PRINTABILITY.

WHEAT STRAW HAS SILICA WHICH INTERFERES WITH CHEMICAL ANDMECHANICAL PULPING AND RECYCLING OF CHEMICALS.

STRAW ACCOUNTS FOR ABOUT 10 MILLION TONNES OF WORLD NON-WOOD PULP PRODUCTION, WITH MOST OF THIS BEING PRODUCED INCHINA.

FROM THESE TWO EXAMPLES WE CAN SEE THAT THE CANADIAN PULPAND PAPER INDUSTRY ALREADY HAS AVAILABLE A NUMBER OFAGRICULTURAL WASTE PRODUCTS WHICH IT CAN TURN TO IF IT WANTSTO EXTEND ITS FIBRE SUPPLY.

15

SLIDE 20

NOW TO CLOSE ON SOME KEY POINTS

INTERNATIONAL DEMAND FOR PULP AND PAPER PRODUCTS ISEXPECTED TO GROW RAPIDLY OVER THE NEXT FEW YEARS,ESPECIALLY IN ASIA.

SOME KEY GROWING ASIAN MARKETS ACCEPT LOW PRODUCTQUALITY, HAVING THEIR KEY FOCUS ON PRICE, SO PRICECOMPETITION WILL BE KEY.

DEMAND WILL BE STRONGEST FOR PRINTING AND WRITING PAPERSAND FOR PACKAGING, BOTH OF WHICH ARE BLENDS OF HARDWOODAND SOFTWOOD PULPS. USE OF RECYCLED PAPER IS EXPECTED TOCONTINUE TO GROW, WITH ITS MARKET SHARE INCREASING RAPIDLY.

WITH NEW PLANTATIONS COMING INTO PRODUCTION, THE SUPPLY OFHARDWOOD PULP, ESPECIALLY FROM SOUTH EAST ASIA IS EXPECTEDTO BE VERY STRONG.

THE CURRENT CANADIAN PULP AND PAPER INDUSTRY IS ORIENTEDTOWARD PRODUCING HIGH QUALITY, LOW COST COMMODITIES ANDTHE INDUSTRY OPERATES MANUFACTURING PLANTS, NOT FACILITIESWHICH EXPERIMENT WITH DIFFERENT FIBRE TYPES.

HEMP IS A NEW RAW MATERIAL TO CANADIAN INDUSTRY, AND ITSCOMMERCIALIZATION WILL REQUIRE THE DEVELOPMENT OF NEWPROCESSES AND TECHNOLOGIES IN ORDER TO OPTIMIZE PRODUCTQUALITY AND QUANTITY AND MINIMIZE COSTS.

AS A NEW MATERIAL, POTENTIAL CUSTOMERS OF HEMP FIBRE WILLLOOK AT HEMP AS ONE OF SEVERAL POSSIBLE TYPES OF FIBRES, ANDWILL DECIDE TO USE HEMP OR SOME OTHER FIBRE DEPENDING UPONFIBRE QUALITY, PRICE, AND PROCESSING ISSUES AND CHALLENGES,AND FINAL MARKET ACCEPTANCE.

THE BAST OF HEMP HAS SPECIALIZED CHARACTERISTICS WHICH LENDITSELF TO HIGH QUALITY USES.

COMPETITION FOR THE BAST MAY BE EXPECTED FROM THETEXTILE INDUSTRY.

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THE BAST MAY FIND COMMERCIAL SUCCESS IN SPECIALTY LOWVOLUME USES.

HOWEVER BAST WILL PROBABLY COMPETE WITH OTHER LONGFIBRES LIKE FLAX AND TROPICAL FIBRES SUCH AS COTTON,ABACA AND SISAL AND WITH SYNTHETIC FIBRES.

SLIDE 21

MUCH OF THE HEMP CORE IS EXTREMELY SHORT FIBRED ANDCONSEQUENTLY

HEMP CORE COMPETES TO VARYING DEGREES WITH A WIDERANGE OF FIBRES INCLUDING RECYCLED WASTE PAPER,HARDWOOD AND OTHER AGRICULTURAL MATERIALS.

THERE ARE HUNDREDS OF VARIETIES AND TYPES OF HEMP, ANDCONSEQUENTLY CHARACTERISTICS VARY WIDELY.

THE IDEAL WOULD SEEM TO BE A HOLLOW STEMMED HEMP WITHGOOD BAST FIBRE, OIL AND SEED PRODUCTION.

SOME RESEARCH NEEDS TO BE DONE TO BETTER ESTABLISHWHICH TYPE OF HEMP IS APPROPRIATE FOR PARTICULAR USES.

FROM A VERY BASIC LEVEL I THINK THE KEY ISSUE WILL BE FORPRODUCERS TO GAIN MARKET ACCEPTANCE.

WITHOUT A CUSTOMER THERE IS LITTLE POINT IN GROWING THISMATERIAL.

ONCE SEVERAL CUSTOMERS HAVE AGREED TO BUY, DETAILEDBUSINESS PLANNING, TECHNICAL AND OTHER ISSUES CAN BEADDRESSED.

WE ALSO NEED SOME NORTH AMERICAN EXPERIENCE AND THEDEVELOPMENT OF TECHNICAL RESULTS AND EXPERTISE AS WELL.

THANK YOU FOR YOUR ATTENTION, AND I HOPE THAT I HAVE PROVIDEDYOU WITH SOME INTERESTING INFORMATION ON THE PULP AND PAPERINDUSTRY IN CANADA AND ABROAD, ITS FIBRE SUPPLY, AND MARKETSAND SOME ISSUES CONCERNING INDUSTRIAL HEMP.