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Forestry

Lumber prices at highest in three years Add to ...

Lumber prices are surging to their highest levels in three years, buoyed by tight supply and better demand, leading industry executives to project a multiyear cycle that will see wood enjoy a boom experienced by other commodities such as oil, copper and coal.

"The worst is definitely behind us," said Ken Shields, chief executive officer of Conifex Inc., a privately held Vancouver lumber producer.

On Friday, the benchmark futures contract for lumber spiked to $315 (U.S.) on the Chicago Mercantile Exchange, the highest in nearly three years as it jumped the maximum daily limit of $10.

The advance, sparked by an improvement in still-moribund new-housing statistics in the United States, highlights a run that has seen lumber rise almost 30 per cent this year, among the best of any commodity. The steady gains have been made on the basis of extremely tight supplies, with lumber yards at many dealers near empty and the amount of new product coming out of the forests of B.C. down from a year ago.

An industry that has gone through a severe three-year depression is now seeing the best quarterly results in recent memory. Starting Friday with West Fraser Timber Co. of Vancouver, North America's largest lumber producer, companies that nearly drowned in red ink will likely report big profits. Some investors have already taken note: Stock of West Fraser, a company that has lost money in 12 of the past 14 quarters, is up almost 30 per cent this year, the 11th-best performer on the 222-company S&P/TSX composite index.

Capital is returning to forestry. In late March, Herb Doman, scion of a lumber fortune that went bust, bought eight sawmills in Ontario and Quebec, financing the deal with $145-million in new equity. Mr. Doman's company, Eacom Timber Corp., is backed by the investors such as mining magnate Frank Giustra. Later this month, Conifex expects to close a $50-million financing to pay for the acquisition of sawmill assets in Mackenzie, the beleaguered town in the B.C. Interior that at one point during the industry depression saw all of its mills shuttered.

Rebirth is happening quickly in Mackenzie. Last year Canfor Corp. reopened its sawmill with a single shift of workers, and in February added another shift. Conifex plans to combine the two mills it purchased into one larger, more efficient operation. Last Friday, Indonesia's Sinar Mas paid $20-million for a bankrupt pulp mill in town (pulp is also in ascendancy) and plans to spend $40-million on the asset to get it running by fall to sell the output in Asia.

As prices improve, foresters are poised to cash in. During the downturn, companies that managed to stay afloat spent the hard months retooling their businesses. West Fraser, already a low-cost operator, cut its operating costs even more and CEO Hank Ketcham in February said: "We are extremely well positioned ... to benefit from improve demand and stronger product prices." Canfor, meanwhile, has improved its mills to make better products and last month sealed a new labour deal with unionized workers that gives the company a break on costs and includes a profit-sharing bonus with employees.

All the action signals the end of what Daryl Swetlishoff calls the industry's "nuclear winter."

"I went for a period where I wouldn't have an incoming call from an investor for weeks," said Mr. Swetlishoff, head of research at Raymond James in Vancouver and the firm's forestry analyst. "Now, I'm on the phone for four, five hours a day."

While prices are up now, and money is coming back to the sector, recovery will still take time, say Mr. Swetlishoff and others such as Ric Slaco, vice-president and chief forester at International Forest Products Ltd. The U.S. new-housing market, the key buyer of Canadian wood, has improved but is still extremely weak, with foreclosures on existing homes still climbing.

Longer term, however, industry players and analysts see an extended boom, because of the reduced supply of lumber resulting from the mountain pine beetle infestation, which has killed wide swaths of forests in the Interior, supplier of about one-sixth of all wood to the United States.

Mr. Swetlishoff, who in a recent report used the language of the oil business to describe "peak lumber," began promoting his theory of a "super cycle" last fall. The basic thesis is that production from the Interior will be down by one-third or more from the peak in the last boom and the missing supply will permanently underpin higher prices, enriching companies such as West Fraser. Its stock is at $42.60 now; Mr. Swetlishoff believes it could eventually rise past $100.

Beyond B.C., industry executive Mr. Doman also sees a shortage of supply in places such as Europe, and is betting on a general global shortfall in wood compared with demand. With more B.C. wood going to China - exports more than doubled in 2009 compared with 2008 - Mr. Doman is convinced that prices will rise and stay high in the longer term. That will benefit his Ontario and Quebec mills, which are eyeing markets in Europe, the U.K. and the Middle East as well as the United States.

"There's simply not enough lumber … and it's just going to get worse," said Mr. Doman. "I don't think it's well understood how bad the problem is."

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