Vancouver — A potent combination of near record-high lumber prices, low interest rates, and the growing availability of cheap beetle-infested logs in British Columbia, means the forest industry in Western Canada may rarely have had it so good.
Despite punitive U.S. duties on Canadian softwood, conditions are so favourable that western giants such as Canfor Corp. and West Fraser Timber Co. Ltd. are easily outperforming Quebec-based rivals like Domtar Inc. and Abitibi-Condolidated Inc.
“There is almost nothing going wrong for the [western] industry right now, it's amazing,'' said Russ Taylor, a Vancouver-based forest sector consultant and author of the Wood Markets newsletter.
In periods of peak demand, the traditional emphasis on building products usually enables western firms to generate superior profits to those of more diversified Quebec companies, which tend to focus on pulp and paper.
Those regional differences were reflected in the strong second-quarter profit reported by Canfor, West Fraser and International Forest Products Ltd., each of which has seen its share price soar in recent months. By contrast, shares of newsprint giant Abitibi hit a 52-week low $8.15 Friday on the Toronto Stock Exchange after the company recently reported a second-quarter loss of $79-million or 18 cents a share.
But at a time when the entire Canadian industry is enjoying the benefits of near-record-high lumber prices, the western companies are getting an added boost from the lower-priced logs and wood chips, analysts say.
This is partly because of continuing efforts in B.C. to salvage huge swaths of timber that have become infested by billions of tiny beetles that burrow into the bark of lodgepole pine trees.
In a bid to persuade loggers to harvest infested trees before they lose their value, the provincial government has lowered stumpage rates [the fee the industry pays to cut trees on Crown land] and is expected to raise the allowable cut in some of the most affected areas.
That in turn has increased the availability of low-cost logs, which firms such as Canfor and West Fraser can use to raise profit margins by running saw mills at full
capacity.
“Profit margins in B.C. are nearly twice as high as in Quebec right now,” said Frank Dottori, chief executive officer of Tembec Inc., a Montreal-based forest company with sawmills in both provinces.
The combination of soaring lumber prices, and recent consolidation in the B.C. industry is creating the kind of efficiencies that the Americans never dreamed of when they slapped punitive duties on Canadian softwood, one analyst said.
“Of course this won't go on forever,” said Laurie Cater, publisher of Madison's Canadian Lumber Reporter, a Vancouver newsletter that tracks wood prices.
“It never does.”
The price of spruce-pine-fir two-by-four lumber surged to an 11-year high of $464 (U.S.) per thousand board feet last week, powered by transportation constraints caused by truck and rail car shortages. That's up from $270 a year ago and just below the all-time high of $475 reached in 1993.
Prices have stayed high even though U.S. housing starts plunged unexpectedly in June to their lowest level in more then a year as rising interest rates slowed the hot housing market.
As western companies continue to enjoy the benefits of a buoyant lumber market, forest companies in Eastern Canada have been constrained by the fact that commodities such as uncoated freesheet paper are seen to be in the early stages of a recovery.
Analysts expect Domtar to benefit from a planned cost restructuring as well as the expected impact of increases in the price of uncoated freesheet [office paper].
“We could see this reflected in Domtar's results in the next six months,” said Mark Bishop, of RBC Dominion Securities Inc. in Vancouver.
But like their rivals in the west, analysts say the eastern companies are also vulnerable to the impact of a slowing U.S. economy, and rising energy prices, factors that could negatively affect future earnings.
