Lumber Prices Expected to Surge

Originally published by: Brandon SunSeptember 12, 2012

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MONTREAL - North American lumber prices are set to surge in the next couple of years amid a tightened supply from Canada as the U.S. housing market continues to strengthen after years of weakness, a new CIBC report predicts.

Spot prices for Western softwood lumber made from spruce, pine and fir trees have steadily increased this year, rising 24 per cent since January to US$310 per thousand board feet in August.

That's 40 per cent higher than two years ago, when the U.S. house-building industry was still suffering from years of over-heated construction activity and a collapse in the mortgage lending industry.

"We believe the underpinnings remain in place for a significantly improved U.S. housing market and a very strong North American lumber market in the 2014/2015 timeframe," analyst Mark Kennedy wrong in a lengthy report.

Higher prices are expected to be supported by significant curtailments in North American production capacity, reduced supply due to mountain pine beetle in British Columbia, increased sales to China and pent up demand in the U.S.

The futures market is suggesting lumber prices will soften over the next two to three months before strengthening early next year as the fundamentals of the U.S. market improve despite some recent mixed signals.

U.S. home building slipped in July after a strong improvement in June, but new permits rose to their highest level in four years.

Housing starts in the United States decreased 1.1 per cent from June to a seasonally adjusted annual rate of 746,000. However, new construction was up 21.5 per cent from a year ago and permits were 29.5 per cent higher.

The increases came as inventories of unsold new homes in the United States hit a 50-year low, home prices appear to have bottomed, and housing affordability is near a record high due to low interest rates.

Kennedy estimated that U.S. housing starts will reach 900,000 next year and just over one million in 2014.

At that level, lumber prices should reach about US$340 per thousand board feet by the first quarter of 2013. The price should average above US$400 if starts reach 1.4 million units per year in 2014.

That's good news for lumber producers in Canada that export to the United States and workers who have faced several years of challenges, Kennedy said.

"As sawmill operating rates hit 80 per cent, we expect lumber prices to move meaningfully and sustainably (higher)...which in turn, should prompt a period of significant and improving profitability for the lumber producers."

Among the companies expected to benefit are Canfor Corp. (TSX:CFP), West Fraser Timber Co. (TSX:WFT), International Forest Products Ltd. (TSX:IFP.A), Conifex Timber Inc. (TSXV:CFF) Western Forest Products Inc. (TSX:WEF) and Tembec (TSX:TMB).

Higher lumber prices will also reduce or even eliminate export taxes paid under terms of the Softwood Lumber Agreement. The taxes are tied to the price of lumber.

Exporters paid a 10 per cent tax in August that is expected to fall back to five per cent in September. It disappears when once prices rise above US$355 per thousand board feet.

Canada shipped some 4.5 billion board feet of lumber to the U.S. in the first half of the year, up 6.5 per cent from the same period in 2011. The value of shipments approached $298 million in June, up from $219 million a year earlier.

In addition to soft demand, the high loonie makes Canadian exports more expensive for U.S. buyers.

While improving demand should support higher prices, Canadian producers will be more challenged to supply lumber in the next upcycle, Kennedy added.

The mountain pine beetle will likely reduce supply from the B.C. Interior by 25 per cent or close to four billion board feet compared with the 2005 cycle. Three billion board feet of lumber is shipped to China that was sent to the U.S. in the past.

Once beetle-kill wood is depleted, supply will dip even further, forcing another six to eight sawmills to close, he said. Lumber capacity has also permanently closed in Ontario and Quebec.

The Canadian industry has the room to add hours and shifts to meet the increasing demand, said industry publication Wood Resource Quarterly.

"However, it is going to be a bumpy road ahead as the sawmilling sector's infrastructure industry has downsized the past three years," it wrote in a recent report.

All provinces except Ontario have produced more lumber this year than last, with Alberta and Quebec experiencing the largest increases.

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