When they look at a forest, most people see a source of paper, cardboard and lumber. But jet fuel?

The notion may seem far-fetched, but not in the beleaguered forestry industry. Efforts to produce airplane fuel, along with environmentally friendly plastics, electricity and futuristic nano-materials, are emerging as alternatives to the dimming fortunes of the sector’s traditional mainstays – newsprint and lumber.

“We’ve done extensive research. The global demand for bioproducts from the forest in the next 10 years will reach $200-billion a year,” predicts Avrim Lazar, head of the Forest Products Association of Canada, which earlier this year issued an unusual manifesto advising companies that the long-term solution to the industry’s woes is to develop sidelines as energy and bioplastics producers.

Mr. Lazar said there is more than enough demand from these novel products to make forestry a thriving business again. The potential “is huge, far more than Canada can meet,” he contends.

Such talk may be just the kind of far sighted, visionary thinking the embattled industry needs. The Canadian forestry sector lost money during the eight-year period ending in 2010. Aided by high pulp prices, it is expected to eke out slim profits this year, according to an estimate by the Conference Board of Canada.

Then again, the interest in transforming wood into alternative products may turn out to be pie-in-the-sky. Given that the industry’s efforts at diversification are at an early stage, it’s premature to say whether the effort will be a boon, as some in the industry hope, or the boondoggle predicted by some critics.

The one thing that is undeniable is that the industry needs some razzmatazz.

Paper demand in North America is in decline because of inroads by all things digital, and is shrinking about 3 per cent to 5 per cent annually. Meanwhile, the U.S. housing market looks like it will be moribund for years, and with it lumber demand. Among traditional products, only pulp, used to make such unglamorous items as toilet paper and cotton-substitute rayon, enjoys a buoyant market, although most experts expect the strength to be fleeting. New pulp capacity is expected to come on stream in 2013, putting downward pressure on prices.

The solution to these negative trends? Borrow a leaf from the biofuels sector. Some foresters are viewing trees as giant versions of corn plants and sugar cane, the traditional sources of biomass-derived energy that are in hot demand due to oil prices and environmental concerns over fossil fuels.

The jet-fuel proposal, being advanced by California-based renewable energy developer Rentech Inc. (RTK-A0.86-0.01-1.25%) and supported by the Ontario government, may offer some clues on whether the industry has found a way to salvage its fortunes.

Rentech recently received the go-ahead from the province to annually chop down 1.1 million cubic metres of timber that is unused because it’s unsuitable for lumber. The company plans to feed this massive stream of wood into a plant to be built in White River in Northern Ontario that will produce aviation fuel, along with raw materials to make plastic and green electricity.

Rentech chief executive officer Hunt Ramsbottom said forests can be used to produce fuel comparable to that produced by a traditional oil field. “You get about a little over a barrel per ton of biomass,” he said. The company’s plant, when it starts operating in four years, will be one of the largest of its kind and the first to produce certified “green” plane fuel. It is expected to crank out 85 million litres annually, enough to keep aloft one out every 10 aircraft using Toronto’s Pearson International Airport.

To get the fuel, the plant will cook trees at high temperatures to turn them into synthetic gas, which will be further processed into liquid fuels. But the development faces formidable hurdles. The plant comes with an estimated $500-million price tag. The company is hoping for a $200-million interest-free loan from Sustainable Development Technology Canada, a federal fund for clean-tech ventures.

The federal money isn’t a make-or-break factor. If Ottawa doesn’t provide financing “it may slow [the project] down, but it doesn’t necessarily stop it,” Mr. Ramsbottom said of the plant.

But critics say the need for government financing suggests these type of ventures aren’t yet economically viable, or are simply too risky to get full private-sector backing.

“I certainly think it’s an unwise use of government funds. If it made economic sense, then private companies would do it on their own,” said Roger Blanchard, chemistry professor at Lake Superior State University in Sault Ste. Marie, Mich.

There are questions over how much fuel can be wrung out of wood, which packs far less energy than crude for its weight. Mr. Blanchard analyzed one wood-fed plant proposed in the U.S. that would make the gasoline additive ethanol, and found it would require more energy to harvest and process the trees than it would yield in motor fuel.

Paper giant Domtar Corp. (UFS-T77.191.081.42%) is looking at another diversification approach. It is in a joint venture with FPInnovations, Canada’s forestry research institute, to build a demonstration plant at its Windsor, Que., mill to extract nano-crystalline cellulose from wood pulp fibre. The material, made of extremely small crystals has about eight times the tensile strength of stainless steel. It may have applications in iridescent films, pigments, high-durability varnishes and bioplastics, among other potential uses.

The Quebec plant will cost $40-million to build and operate, and is scheduled to open later this year or early 2012.

Although the pilot plant will only produce one tonne a day, Domtar believes nano-crystalline cellulose will command a price substantially higher than pulp. If there is sufficient demand, a larger scale operation will follow. “This is a long-term call option on the future,” Domtar spokesman Pascal Bossé said.

And that is the rub for the industry. Any salvation from new products is likely going to be a long-term proposition, and will require tremendous growth to make much of difference. Domtar, for instance, has a pulp capacity of about 450,000 tonnes at its Windsor mill, suggesting nano-material will amount to only a small sideline.

Rodney Young, one of the world’s top forestry analysts, said he “can see why” there is so much interest in diversifying in the Canadian forestry sector. “They’re all looking at this because it potentially is the long-term morphing of the industry into products other than paper,” said Mr. Young, chief economic adviser at RISI, a Boston-based information firm that tracts the industry.

But developments such as nano-particles won’t be an immediate saviour, he warned. “I think it’s a great idea. There is a potential out there, but it’s five to 10 years away probably,” Mr. Young said.