Paper rollPaul Politis
The media's focus on oil and mining can sometimes get a little intense, making it easy to forget that Canada is also well known for its forest industry, a space that is starting to look quite appealing once again.
Just before the long weekend, the Pulp and Paper Products Council released March pulp data and the numbers are enticing. Shipments from "world-20" producers that comprise about 80 per cent of global capacity were up 17 per cent year-over-year, setting a new all-time record. There was also a 21 per cent increase in softwood pulp shipments and a 14 per cent increase in hardwood shipments.
Some firms have already taken advantage of the strength. Two pension funds have announced a deal to buy TimberWest Forest Corp. and Fortress Paper tapped the market to raise some new funds.
However, much of the strength is dictated by Chinese demand (of course) and some people expect that demand to soften. Anecdotal reports have already suggested it has, with some people speculating that Chinese firms have already stocked too much inventory, noted TD Securities analyst Sean Steuart.
Still, over the long term, some analysts believe the fundamentals will remain. "In our view, this pulp cycle differs from previous peaks as Chinese demand, traditionally prone to periods of destocking at times of high prices, does not appear to be abating," said Raymond James analyst Daryl Swetlishoff, "leading us to see the potential for an extended period of elevated pricing, particularly if the tenuous economic recoveries in the U.S. and Western Europe continue to entrench themselves."
TD isn't so sure about the Chinese demand, but it does like the long-term outlook overall. "With decelerating commodity and earnings momentum, we anticipate a correction in pulp-weighted equities over the next few months. That said, we continue to believe that several pulp companies are poised to generate strong free cash flow over the next two years and consider several of these names attractively valued on long term earnings potential."
Tim Kiladze