Western Forest Products Inc. Are Leading Canadian Lumber Producers

West Fraser Timber Co. And Western Forest Products Inc. Are leading Canadian lumber producers to the biggest combined profit since 2006 as mills run at five-year highs to feed a U. S. Housing rebound and near-record Chinese demand. Lumber mills in British Columbia, Canada’s leading forestry region, ran at 86% of production capacity in the five months through May, compared with 82% for all of 2011, according to the Western Wood Products Association. Lumber futures rose to a 15-month high on Aug. 15 on the Chicago Mercantile Exchange. The industry is recovering from losses and mill closures during the four-year U. S. Housing bust amid resurgent new-home sales and building activity south of the border. Some producers are also capitalizing on orders from China for imported Canadian lumber even as the Asian country’s economy slows. “We’re extremely early on in the lumber cycle and it has the potential to be a four-year run, ” Paul Jannke, a lumber- market analyst at Westford, Massachusetts-based Forest Economic Advisors LLC, said in a telephone interview. He estimates the industry in West Canada in 2012 will probably earn the most since before the housing decline and that next year is looking even better. Shares of West Fraser, the largest North American maker of softwood lumber used in home construction, have advanced 34% this year in Toronto while Western Forest gained 31%. The S&P/Toronto Stock Exchange Composite Index rose 1.1%. Spectacular Combination “For lumber producers, it’s really the combination of China and the U. S. That’s been so spectacular, ” David Elstone, an analyst at Gibsons, British Columbia-based research firm ERA Forest Products Research, said in a telephone interview. ERA recommends holding West Fraser shares. “We have market diversification that we’ve never seen before, with the U. S. As the biggest, China in second, and we still have Japan, ” he said. For lumber producers, it’s really the combination of China and the U. S. That’s been so spectacular West Fraser’s British Columbia and Alberta mills operated at full capacity in the second quarter, the company said on a conference call last month. The Vancouver-based company’s earnings before one-time items will more than double to $59.8-million this year, according to the average of four analysts’ estimates compiled by Bloomberg. Profit will advance to $191.5-million next year, the highest since 2006, according to the analysts. Strandboard Demand “We’re price takers and we run our business on cost control, ” West Fraser Chief Financial Officer Larry Hughes said by telephone on Aug. 23. He declined to comment on the outlook for earnings. The company mostly harvests trees in British Columbia’s interior. Western Forest, which operates in the province’s coastal forests, will see its earnings climb 52% this year and more than double in 2013 to the highest since at least 2004, according to analysts. Stronger U. S. Demand for building materials is also helping Toronto-based Norbord Inc. And other makers of oriented strandboard, a plywood substitute. Norbord, which has its biggest operations in the southern U. S., has doubled this year to $16.21 this year in Toronto on higher prices for the material. Norbord executives weren’t immediately available for comment. Lumber futures in Chicago fell 0.4% to US$291.90 per 1, 000 board feet on Aug. 24. They traded at US$309.50 on Aug. 13. One board foot of wood is 1 inch thick and 1 foot square. Pine Beetles Oriented strandboard rose 24% through July, according to monthly price data from the U. S. Bureau of Labor. While U. S. Housing starts fell 1.1% in July versus June, the number of building permits climbed to an annual rate of 812, 000 last month, the most since August 2008, according to Commerce Department data. That suggests residential construction activity in the largest export market for Canadian lumber may extend gains in the second half of the year. Historically low borrowing costs are among reasons that demand for homes in the U. S. Is increasing. About 36% of British Columbia lumber was exported to the U. S. In the first six months of this year, according to FEA’s Jannke. Canada ships higher-quality lumber to the U. S. For use in new-home building and residential renovations, according to Elstone. Much of the lumber destined for China is lower-quality wood from trees killed by mountain pine beetles, he said. The infestation in the interior of British Columbia is the world’s worst. The affected lumber is used in residential construction and for making concrete forms. China Exports Canadian lumber exports to China were about 1.2 billion nominal board feet in the second quarter, the second-highest quarterly tally on record, FEA’s Jannke said. By comparison, the quarterly average in 2009 was about 400 million board feet. The Chinese consumer, they are essentially in love with our SPF product Most of the Chinese imports are comprised of spruce, pine and fir — known in the industry as SPF — that comes from British Columbia, ERA data show. “The Chinese consumer, they are essentially in love with our SPF product, ” ERA’s Elstone said. Chinese demand for British Columbia lumber is showing signs of easing, said Bryan Yu, Vancouver-based economist at Central 1 Credit Union, a trade association for credit unions in British Columbia and Ontario. Pulp Demand “China has really stepped up in recent years to support our forest industry, ” Yu said in a telephone interview. “We are now seeing some cresting of lumber exports to both China and the U. S. ” Canfor, North America’s second-largest soft-wood lumber producer by production capacity, will have a loss of about $14-million this year, according to the average of four analysts’ estimates. That partly reflects expectations for the company’s 50%-owned Canfor Pulp Products Inc. Amid weak demand and falling prices for pulp used to make paper tissue and printing and writing paper, ERA’s Elstone said. Next year will probably be better. The analysts surveyed expect Canfor to swing to a profit $72.7-million in 2013, according to the average of their estimates. Canfor has risen 19% this year to $12.72 in Toronto trading. Patrick Elliott, a Canfor spokesman, didn’t immediately return a call for comment. “There are risks to the lumber recovery, such as the U. S. Election and the health of the global economy, ” said ERA’s Elstone. “But this is a cycle that looks like it’s turned for the better. ” Source: financialpost