Supercycle for global lumber prices predicted

More B.C. mills predicted to close, but survivors poised to profit from new era of prosperity
Teal Jones CFO Hanif Karmally said his company's insurance rates are increasing 25% to 50%, thanks in part to a series of fires in B.C. mills this year

Two dozen B.C. sawmills have been shuttered since about 2005, and the industry expects at least half a dozen more will be shut down by the middle of the decade as an abundant supply of cheap pine runs out.

While that might not be good for the communities that depend on those mills for jobs, it's not a bad thing for the mills that are left standing, says Russell Taylor, president and CEO of the International Wood Markets Group, because the industry is entering what is expected to be an era of prosperity.

"We've been predicting a supercycle in lumber prices because we've got a bunch of supply constraints going on," Taylor said.

"The whole supply chain is tightening up, and there's not a lot of incremental supply available from other countries around the world. The supply constraint means those who are still around are going to do very, very well."

The B.C. Interior lumber industry was hit in 2006 with the subprime mortgage meltdown, followed by the 2008 recession, both of which dramatically slowed the U.S. housing market.

This year, the U.S. is on track to build between 740,000 and 750,000 new homes; next year's new home starts are projected to be in the 880,000 to 900,000 range.

Interior spruce, pine and fir log prices rose about 10% to US$51 per cubic metre in 2012's second quarter, compared with a year ago.

The recovery is reflected in some of the investments in B.C. mills and in some of the recent financials posted by forestry companies.

While Canfor Pulp Products Inc. (TSX:CFX) reported a third-quarter loss of $4.6 million ($0.06 per share), its Canfor Corp. (TSX:CFP) wood products division parent company reported a net income of $22.2 million.

Canfor has invested $38.5 million upgrading and reopening a sawmill in Radium Hotsprings that it shut down in 2009.

It also built a new planer mill. Other companies are likewise investing in mill upgrades in B.C.

An abundance of pine from the mountain pine beetle infestation will soon plateau, creating supply constraints, while the demand for lumber increases in the U.S. and in China.

There are also constraints on Russian logs and lumber, Taylor said, so China is expected to become more reliant on North American lumber.

That demand, coinciding with a recovery in the American housing market, is expected to drive lumber prices up.

The B.C. government is trying to increase the fibre supply through a mid-term timber supply plan that includes opening up marginal stands of timber to harvesting, but Taylor doubts that can address the supply gap.

"I can't believe it's going to find all the timber [needed], so there's going to be some casualties. I think everyone expects to see mill closures – we figure between half a dozen and up to a dozen mills still yet to close. For the mills that are going to be around, it's going to be really good." •





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