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Scott Barlow

The Canadian equity market once featured some of the world's most dominant paper and forest companies, but we've successfully sold most of them to the Americans. As a result, domestic investors are largely unaware that a recovery in Chinese timber demand and, to a lesser extent, rising U.S. housing construction, are creating a markedly positive outlook for the sector.

There are now only three companies – Canfor Corp., Norbord Inc. and West Fraser Timber Co. – in the S&P/TSX Paper and Forest Products Industry Index which has jumped 54.5 per cent over the past twelve months and 22 per cent so far in 2013.

A strong Canadian housing market has been a consistent, dependable source of demand for domestic forestry companies. The variations in profits and stock prices have been caused by global markets, notably U.S. and Chinese lumber demand.

In the United States, lumber prices have recovered 19 per cent after a bloodcurdling 32 per cent swoon between March and May of this year. In China, timber imports declined by a monthly average of 10 per cent in the latter half of 2012 but the trend has reversed in 2013. The year-over-year monthly rise in Chinese timber imports has averaged 12.2 per cent.

Analyst opinion on Norbord is mixed – seven buys and three holds – but the views are almost universally optimistic on Canfor and West Fraser despite recent gains. Both companies are focused in lumber, which comprises about 60 per cent of sales, and Canfor has the added advantage of direct exposure to Asia where the company generates almost 40 per cent of revenues.

The average 12 month target price implies an 18.5 per cent expected return for West Fraser and 16.5 per cent for Canfor.

Scott Barlow is a contributor to Globe Unlimited. Click here to read more of his work , and follow Scott on Twitter at @SBarlow_ROB.

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