West Fraser Timber Co. Ltd. says the worst is over in the forestry business as demand returns and lumber prices continue to rebound from one of the most devastating periods in the industry's history.
"We believe we can now see the light at the end of the tunnel in terms of the deep recession our lumber industry has suffered through since late 2006," West Fraser chief executive officer Hank Ketcham told analysts on a conference call Monday.
The call came a day ahead of West Fraser's annual meeting in Quesnel, B.C., and after the Vancouver company reported its first quarterly profit in two years.
North American lumber prices were up 31 per cent during the first quarter of 2010, Mr. Ketcham said, and he expects prices to remain strong during the busy spring building season.
Higher prices are being fuelled by an imbalance between a depleted supply and pent up demand. Dealers and wholesalers are beginning to restock lumber in advance of the spring and summer construction season, but inventories are restricted because forestry companies shut many of their mills during the recession and the slump in the U.S. housing sector.
But they are also a result of temporary factors creating a shortage in the global marketplace, that hurt international competitors. These include a weather-related stop-work order in the southern U.S., an earthquake in Chile, a port strike in Finland, and a new log export tax in Russia, said Andrew Casey, vice-president of trade at the Forest Products Association of Canada.
"The question is, how long does that shortage stay in place? " he asked, adding the higher prices are encouraging, but it's too early to say whether they form a long-term trend.
Prices in March were so high that export duty rates on shipments from Canada to the U.S. will drop from 15 per cent to 10 per cent on May 1- marking the first time prices reached the $315 threshold since the Softwood Lumber Agreement between the U.S. and Canada came into effect in 2006.
If prices continue to rise, the duty could fall even further - to 5 or zero per cent - in June.
Mr. Casey said the reduction in duties could help to offset the detrimental effects of the strong loonie, which will make Canadian lumber more affordable.
Mr. Ketcham said that supply and demand are coming back into balance after industry-wide downsizing during what he called a "depression" in the industry.
Vancouver-based West Fraser saw profits rise to $19.4-million, or 45 cents per share, in the first quarter of the year, compared with a loss of $83.1-million, or $1.94 per share, a year ago. Sales totalled $687.8-million, up from $558.2-million.
The Canadian lumber industry has been hammered by the U.S. housing crisis, since most of its product is used south of the border. To cope with a drop in demand, forestry firms have cut capacity by as much as 50 per cent, closing mills and laying off thousands of workers to try to stave off deeper losses.
Mr. Ketcham said he believes the worst is over in the business and housing fundamentals will gradually improve as the U.S. housing market begins to improve later this year.
He said lumber prices will remain solid for at least the next couple of months, but added that the improved pricing will encourage producers to ramp up capacity, which will dampen prices after the spring as new home construction remains weak.
"Housing starts in the U.S. are still near historically low levels and we believe it will be a long and bumpy ride before new-home construction returns to a level that supports long term demand..."
Pulp and paper prices will also continue to improve through the third quarter of the year, reflecting strong buying from China and extremely low pulp inventories, he said.
The company's Canadian mills were running at around 95 per cent of capacity as it added a third shift at one of its Alberta mills during the quarter. Mr. Ketcham said the mils have sufficient log inventory to run at full capacity during the second quarter that ends June 30.
Meanwhile, West Fraser's mills in the U.S. ran at about 55 per cent capacity during the quarter due to weather-related slowdowns and are expected to ramp up to about 70 per cent production in the second quarter.
The company recorded a $15-million loss during the quarter from the shutdown of its Eurocan mill in Kitimat, B.C., on Jan. 31.
Mr. Ketcham said the company scaled back capital spending for the first time in its history during the recession, but now has a strong balance sheet and plans to be more aggressive on spending and paying down its debt.
"The past three years have been the most difficult in memory for our industry, but I believe that West Fraser has emerged as a stronger and even more competitive company than we were going into this recession," he said.
Last week, International Forest Products Ltd. said its first quarter revenue nearly doubled to $139.9-million, up sharply from $77.3-million, last year. It also credited higher lumber prices for its improved financial results.