Canadian foresters are being battered by the plunging price of lumber, with the latest blow coming as new-home sales in the crucial U.S. market have fallen to an all-time low.
It brought a swift end to nascent hopes for an industry rebound that had bloomed in spring as lumber prices rose on tight supply, even as executives and investors acknowledged the recovery would be bumpy because demand for lumber was still very weak.
Just how weak wasn't clear until Wednesday, when the U.S. Commerce Department reported its smallest new-home sales number, 300,000 in May. The seasonally adjusted annualized figure was down a third from April - the worst fall on record - and far below forecasts of around 400,000.
The sharp decline came after a recession-fighting tax credit of as much as $8,000 for first-time home buyers expired on April 30, which shows how important government stimulus was in underpinning the fragile housing business.
For Canadian lumber producers, it is the latest blow in a four-year slump that had appeared to ebb and now looks like it is back in full force.
No buyers for new homes, plus the millions of existing homes sitting for sale on the market in foreclosure and otherwise, adds up to a bad-looking 2010, said analyst David Elstone of Equity Research Associates.
"It's pretty dismal," he said. "There's just too much existing home inventory out there."
The spiralling price of lumber means higher costs for Canadian foresters in July. A 10 per cent tax will be levied, Scotia Capital Inc. noted on Wednesday, as per the provisions of the Softwood Lumber Agreement of 2006. In June, because prices were high, the tax was at zero for the first time since the deal was put in place.
It is a double whammy: lower prices for the product and added costs.
For industry leader West Fraser Timber Co. Ltd. , the tax amounted to $19.2-million in the first three months of 2010, 3 per cent of total sales of $688-million.
Random-length lumber futures contracts - the kind of wood used to build new homes - last September and October traded around $220 (U.S.) on the Chicago Mercantile Exchange. As supplies tightened - Canadian foresters cut down fewer trees through the winter because of weak demand for the product - prices rose and eventually spiked to $330 in late April, the highest in three years.
The price quickly reversed but even in late May, when it was around $240, company stocks held strong on the prevailing notion the price had hit bottom. Stock of West Fraser was still up more than 20 per cent for the year, the 11th-best performance among the S&P/TSX composite index's 222 members.
Lumber on Wednesday fell 5 per cent to $178.40. West Fraser, the largest lumber producer in North America, fell 2 per cent to $34.70, down 24 per cent from its peak in early May.
The stock now ranks 108th of the recently expanded 229-member index.
Even though the gain is more muted, it suggests investors still believe in the longer-term promise of Canadian forestry, which envisions a market with much tighter supply over the next half decade because of the forests killed by pine beetles in British Columbia and less acreage available for harvest in Ontario and Quebec. This, the thesis goes, could easily buoy and sustain prices when demand eventually normalizes in the United States.
"If you forgot lumber was volatile I guess the last six months is a good reminder," said analyst Chris Damas of BCMI Research.
U.S. builders have reacted to the massive amounts of available existing housing by aggressively slowing house building: The annualized rate of new homes available for sale is 213,000, according to government data, less than half the number of two years ago and the lowest since 1970.