Canada’s major forestry companies are riding an industry upswing as their share prices soar despite trade disputes with the United States and delays in shipments.
For investors big and small, the stock rally since early 2017 has been a welcome sight in a sector that has gone through a series of economic downturns.
“It’s a cyclical industry, and cycles come and go,” business magnate Jim Pattison, who has invested heavily in B.C. forestry companies, said in an interview. “The key is to take advantage of the cycles when the time comes.”
Analysts say forestry firms have invested heavily in new technology to become more efficient at sawmills, including the use of sensors and lasers to make the most of each log.
Mr. Pattison points to the evidence on the shop floor. “You go through a mill, and it’s a lot different [than] when you used to go through. New technology has moved in,” said the 89-year-old billionaire.
The difference this time in the commodity cycle is that lumber in particular might be in the early stages of an extended rally. Raymond James Ltd. analyst Daryl Swetlishoff said lumber producers are poised to enjoy what he calls a “supercycle” − a multiyear boom in which producers enjoy both high softwood prices and strong output at their mills.
Mr. Pattison, who owns nearly half of Canfor Corp. and more than 10 per cent of West Fraser Timber Co. Ltd., said he’s pleased to see the forestry sector find its footing. Since the beginning of 2017, the share prices of both companies have nearly doubled.
Canfor closed at $29.96 on Friday on the Toronto Stock Exchange while West Fraser finished at $89.75 – both near their record highs. Mr. Pattison’s Canfor stake is now valued at $1.9-billion and his interest in West Fraser is worth more than $700-million.
Mr. Swetlishoff originally floated the notion of “peak lumber” back in 2010, and while it has taken longer than envisaged for a sustained upswing to emerge, he sees signs of a combination of robust demand, tight supply and strong prices. “More recently, lumber prices have hit all-time highs as elements of the supercycle thesis have come to pass,” he said in a research note.
On the demand side, fears of reduced lumber orders from the U.S. due to the cross-border softwood dispute have proven to be overblown. In 2017, the U.S. Department of Commerce imposed final countervailing and anti-dumping tariffs averaging 20.23 per cent against most Canadian lumber producers.
While mill operators in Canada remain worried that their communities will face tough times if the softwood fight lingers through 2018 and 2019, most Canadian lumber producers are weathering the softwood duties by passing on most of the extra costs to U.S. home builders.
RBC Dominion Securities Inc. analyst Paul Quinn said transportation problems have hindered deliveries of wood products this year. “Railcar availability continued to be an issue for some mills but improvements in trucking availability were noted,” he said.
Don Kayne, Canfor’s chief executive officer, acknowledges the challenges with logistics bottlenecks. In the long term, he sees supply and demand being favourable for the lumber business, especially for B.C.-based producers such as Canfor that are able to export to Asia.
“Without question, there is increasing demand for our products around the world, especially since 2016,” Mr. Kayne said in an interview, noting brisk orders from Japan, China and South Korea. “In North America, it has been slow growth but steady growth.”
He said institutional investors have sensed the optimism in the forestry sector. “There’s an increasing positive sentiment for our industry. Over the last 10 years, most Canadian companies have invested significantly in their operations to improve their competitiveness on a global scale. That’s helped a lot,” Mr. Kayne said.
Resolute Forest Products Ltd. CEO Yves Laflamme, who replaced the retired Richard Garneau in February, said it boils down to operating more efficiently than a decade ago. “We’re pretty optimistic about wood. We have invested to do better with the same log, the same wood,” he said.
Canfor, West Fraser and Interfor Corp. have benefited from their U.S. lumber operations, while Resolute has pulp and paper mills south of the border. Interfor’s stock price has surged almost 80 per cent since the start of 2017, closing at $24.78 on Friday.
But it hasn’t been a steady climb up for all Canadian forestry firms. Resolute has been on a roller coaster, including a ride down in February, when the Montreal-based company missed fourth-quarter profit expectations and also got hurt by lingering investor concerns about a shortage of truck drivers. Nevertheless, Resolute shares have risen 78 per cent since the start of 2017, closing at $12.73 on Friday.
Resolute produces newsprint, but Canfor, West Fraser and Interfor do not. The U.S. Commerce Department hit Resolute with countervailing duties of 4.42 per cent against the company’s Canadian newsprint in January, but did not impose an anti-dumping tariff.
Resolute, Canfor Pulp Products Inc. and Domtar Corp. have announced price increases for pulp in North America, affecting northern bleached softwood kraft markets. “The strength of pulp markets in 2017 has continued in 2018 as producers continue to push prices higher,” Mr. Quinn said.