Lumber boom-bust cycle prepares producers for year-end rally | Economy
Falling lumber prices may have caused producer shares to plummet in recent weeks, but analysts and traders say if history is any guide, stocks are poised for a rebound as the house-building season begins towards the end of the year.
Over the past 20 years, lumber prices and the stocks of the companies of West Fraser Timber Co. and Canfor Corp. at Louisiana-Pacific Corp. RBC Capital Markets analyst Paul Quinn says this go-around shouldn’t be any different.
“We see a positive setup for traditional seasonal trading, where stocks will typically bottom around mid-late October before recovering in anticipation of the next construction season,” Quinn wrote in a note to clients last week. . Demand for wood products is expected to increase once homeowners return from their summer vacation and slow spending on leisure activities, he added, citing lumber traders. Quinn’s top “high-value” choices in the industry include Canfor, Conifex Timber Inc., and Western Forest Products Inc.
Lumber futures jumped more than 300% in the year through mid-May as homeowners increased their spending on do-it-yourself renovations and Low mortgage rates spurred a construction boom, catching depleted sawmills by surprise. Anticipating a continued increase, producers increased supply and drop-in centers aggressively sourced, only to see demand fall back on Earth. Futures prices fell more than 70 percent in the wake, and lumber merchants were forced to sell off their inventories, Quinn said.
The sudden crash took its toll on producers. Western Forest Products is down about 20 percent from its May high, while Canfor, which said Wednesday it was cutting operations at some of its British Columbia sawmills, fell more than 25 percent. hundred. Conifex Timber, which lost more than 30% over the period, announced last week that it would temporarily slow production at its sawmill in Mackenzie, British Columbia, due to an “unprecedented collapse in lumber prices. of work “.
Producers in the main interior of British Columbia, where about 14% of North America’s lumber comes from, are now “underwater” with mill cash costs region of about $ 525 to $ 575 per thousand board feet in the second half of 2021, Canadian Imperial Bank of Commerce wrote analyst Hamir Patel in an Aug. 19 note.
Lumber producer stocks are trading at a “significant discount” and the worst of the sale is likely over, Quinn wrote in a separate report. “While lumber inventories will likely remain under pressure until prices start to rise, we believe the worst of the declines are over and now is the right time to start adjusting to the market. sector, ”he added.