British Columbia's softwood lumber industry is finally on the comeback trail, fuelled by a recovery in U.S. housing starts and steady demand from China.
"The outlook for the softwood sector in general is quite positive over the next few years as we go through a growth cycle," said David Elstone, a senior analyst with ERA Forest Products Research.
He is predicting U.S. housing starts of 835,000 in 2013 and 950,000 in 2014, up from an industry forecast of 746,000 this year. "We're rising out of a trough in U.S. housing starts," said Mr. Elstone, who noted that Vancouver-based lumber producers such as Canfor Corp., West Fraser Timber Co. Ltd. and Conifex Timber Inc. will be among the beneficiaries of the market's rebound.
With softwood lumber prices strengthening in 2012, producers are expected to report healthy third-quarter financial results.
The Random Lengths framing lumber composite price, which is closely watched by the forestry industry, averaged $264 (U.S.) for 1,000 board feet earlier this year, but surged 27 per cent since then to surpass $336 in September.
A seasonal slowdown is inevitable as colder weather reduces demand for lumber at construction sites, but prices are forecast to stay robust, compared with last year's fourth quarter.
While much of the focus in 2012 has been on the U.S. housing market being on the mend, the trend of strong demand from China in recent years is expected to continue.
Paul Quinn, a forest products analyst with RBC Dominion Securities Inc., said lumber prices have climbed high enough to translate into attractive returns for B.C. producers.
"It's definitely getting better, and the U.S. market has been a bright spot," said Mr. Quinn, who predicts that U.S. housing starts could reach 900,000 next year.
Under a 2006 softwood lumber agreement between Canada and the United States, an export tax collected by the Canadian government and remitted to British Columbia is designed to decline as lumber prices ascend.
During most of the past six years, the tax charge applied to B.C. lumber exporters has been 15 per cent, said John Allan, president of the B.C. Lumber Trade Council. But for October, the tax rate will fall to 5 per cent from 10 per cent in September. If the monthly average exceeds $355 for 1,000 board feet, that export charge will be suspended, providing a further lift to producers.
Analysts expect lumber prices to weaken this winter as demand falters due to a seasonal slowdown, but the rally should resume next spring.
The U.S. housing market is now headed in the right direction after the pain of the recession, when home starts slumped to 558,000 in 2008, but there are some lingering concerns.
"The U.S. South is by far the largest region for both housing starts and new-house sales. Essentially, it is the main engine that will add major torque to a recovery. Unfortunately, the South may not be firing on all cylinders," based on new-house sales data. Year-to-date new-house sales for the South are lagging that of other U.S. regions, according to a recent report by ERA Forest Products Research
Bank of Nova Scotia stressed that the U.S. housing recovery is fragile, and even if home construction starts reach 850,000 next year, that remains well below the level of about 2 million in 2005. Sawmill closings in both Canada and the United States, as well as labour shortages, will create challenges to meet increased demand, Scotiabank said.