BC lumber producers facing it tough

ERA Research

BC log costs are moving higher again (chart 1), and with S-P-F lumber prices rolling over—2x4 prices recently declined to $332—the ERA Forest Products team believe that the majority of BC sawmills are losing money today. Lumber prices are slumping across all species and dimensions, but log costs in BC are significantly higher (chart 2). More downtime is needed in all regions to remedy the issue. How to trade it? Most names will see limited further downside from current levels and upside catalysts remain elusive for now. The team do see long-term value in Canfor ($18 target price), Interfor ($22) and West Fraser ($116) but recommends that investors wait until at least Q4/2024 before building long positions.

- 12 July, 2024

Softwood lumber duties set to move higher this summer

ERA Research

Preliminary results of the US Department of Commerce’s fifth administrative review into the 2022 North American lumber market sees an increase in combined duty rates, pointing to the potential for significant rate increases for next year’s review. Looking to 2023, S-P-F 2x4 prices averaged just $391 and spent most of the year near, or below, cash-cost levels; the ERA team expect that overall duties could increase sharply for the next review. So, who wins? US-based lumber mills (and perhaps Europeans exporting to the US) are the only winners as onerous softwood lumber duties increase Canadian producers’ costs. The release of the preliminary duties does not change ERA’s view on lumber equities, who sees upside from current levels for all lumber names given expectations for a sustained recovery in US housing. Interfor remains their top pick (target price $28), with West Fraser (TP: $116) and Canfor (TP $25) also seeing upside.

- 09 February, 2024

Lumber demand remains tepid

ERA Research

Lumber prices moved higher last week for most species as the ongoing threat of wildfires and news of curtailments in western Canada drove increased activity in the market. SYP 2x4s were one of the few products to post w/w declines, with prices slipping by $11 to $385. In Western Canada, S-P-F 2x4s finished the week up $30 at $380, with news of West Fraser’s 33MMbf curtailment (all BC mills except for Quesnel are down for two weeks as of June 19) spurring increased buyer interest. Demand remains tepid and ERA does not anticipate modestly curtailed supply to be the catalyst for a sustained run on prices.

- 23 June, 2023

Forest Products: Tough year ahead

Materials

ERA Research

The outlook for lumber / panel producers (Canfor, West Fraser, Boise Cascade, Louisiana-Pacific) is difficult, with no obvious upside catalyst before a recovery in US housing (unlikely before late 2023). ERA expects pulp prices to move lower through 1H23. Anticipated price declines are now almost fully priced into pulp names (Mercer, International Paper). In packaging, more pain lies in store for containerboard (Westrock) and a raft downtime will be needed to combat weaker demand and offset new capacity. Boxboard will outperform (Graphic Packaging, Clearwater Paper), with both demand and prices expected to remain robust.

- 06 January, 2023

West Fraser (WFG CN) Canada

Materials

ERA Research

Prices for both lumber and OSB are surging - both businesses will generate spectacular FCF for WFG through at least 1H22. Concerns about rapid interest rate increases and sluggish housing demand are overstated, while limited supply growth should keep lumber (and panel) prices well above historical averages for several quarters to come. ERA’s target price of $155 is based on a very conservative 4.0x multiple applied to a 50/50 blend of 2022E/2023E EBITDA of $2.7bn.

- 18 February, 2022

North American OSB production

ERA Research

North American OSB markets have shifted into high gear, with benchmark North Central 7/13” prices up by $145, to $800 over the last three weeks (see chart). While demand has been robust, supply shortages have had greater impact on the market. Despite two OSB mill restarts in 2021, prices have not begun cycling back closer to historical averages and higher prices are here to stay for another couple of years. To play it, go for West Fraser Timber and Louisiana-Pacific Corp.

- 04 February, 2022

West Fraser (WFG CN) Canada

Materials

ERA Research

Lumber prices have corrected sharply after reaching $1600+ in Q2, but historically high prices will persist for at least another year. Market downtime in BC (cost related) should keep the price floor high (~$600) for several quarters, benefitting producers in other regions (73% of WFG’s capacity is ex-BC). Prices may trend sideways for the balance of Q3 as supply chain inventories adjust, but ERA Research expect a strong seasonal trade (late-Sept to May) as R&R demand recovers and housing remains robust. TP C$140 (55% upside).

- 06 August, 2021