BETTER TIMES AHEAD?
According to TD Economics, the forest industry may see better times ahead. However, the improvements are not expected for some time.
"Patience is a virtue for this beleaguered sector," notes TD economist Leslie Preston in an “Observation” report, issued by TD last week. While the report states there have been cyclical gains in other resource sectors, it says the lumber industry still faces prices that are 36 per cent lower than previous cycle highs. At the same time, the report says, “a much needed recovery in U.S. homebuilding is seemingly nowhere in sight.”
The report does predict an eventual recovery will occur in U.S. housing starts, and Preston adds that “continued demand growth from China is set to drive an upswing in lumber demand late in 2013.”
According to the report, that “demand recovery” will occur “against a far leaner capacity backdrop at the mill level,” which is expected to result in a “notable rally in lumber prices.”
Preston also says significant restructuring in the lumber sector over the past decade means producers “who can hang on through more near-term difficulties,” should see an improvement in profits.
The report author does caution that further capacity reductions will occur this year, “setting the stage for an upswing in prices once U.S. demand starts coming back on stream.”
However, Preston says they don’t see lumber prices “topping US$300” per thousand board feet on a sustained basis until 2013.
The big increase in lumber output “from the depths of the recession” has been largely due to demand from China “growing by leaps and bounds,” says Preston. “Canada’s lumber exports to China were up over 100 per cent in 2010, and 140 per cent so far in 2011.”
In summary, Preston says “a meaningful improvement in Canada’s lumber output awaits a recovery in U.S. homebuilding.” He adds, “For producers who can weather continued weakness in the medium-term, higher prices will greatly improve profitability in an industry that has endured 10 very difficult years.”
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