When it comes to investing in commodities and commodity producers, you might be focused on oil, natural gas and potash – but for potentially bigger gains maybe it's about time you turned your attention to one of the few commodity disaster stories: lumber.
The lumber market has fallen on hard times, to be sure, given that it is largely connected to the U.S. home-building industry (and we all know where that has been going). Recent statistics do a nice job of describing the downturn: U.S. housing starts have fallen more than 55 per cent since hitting a peak in 2006; total North American lumber consumption has fallen 14 per cent, year over year, in the second quarter of 2008, following a 9 per cent year-over-year drop in the first quarter.
As a result, Canadian lumber producers have been slashing their production to try to keep up (or rather down) with the weak market: Canadian production alone tumbled 24 per cent in the first quarter, which hasn't been kind to stock prices.
Canfor Corp., the largest lumber producer, is scheduled to report its quarterly results on Wednesday, and the results aren't likely to be pretty. Analysts estimate the company will report a loss of 31.5 cents. Over the past 12 months, Canfor's stock has fallen 41.7 per cent; it traded on Wednesday afternoon at $7.45, up 2.9 per cent.
Yes, all of this is dismal news – but there's an investment opportunity before the housing market hits bottom, since lumber prices typically lead the housing cycle.
“While we don't expect the U.S. housing market to begin a recovery in earnest until 2010, we see lumber as one of the commodity leaders in terms of price gains in 2009,” said Dina Cover, an economist at Toronto-Dominion Bank, in a note to clients.
Indeed, she sees lumber prices rising 15 per cent in 2009, ending four years of declines and making it the top performing commodity next year. If the stock market leads the recovery in lumber by about six months, then now may be an ideal time to ditch those dreams of oil wealth and head for the forests.
