Lumber and forest-product stocks have been on a huge tear over the past year as the U.S. housing market recovers, but there is still more room for prices to rise thanks to the emergence of a “super cycle” in the underlying commodity, say analysts.
“Although it is a cyclical area and we have seen forestry stocks appreciate greatly in the past 12 months due to the recovery in the U.S. housing market, demand is greater than supply, which should push areas of the sector higher,” said Arthur Salzer, chief executive at Northland Wealth Management Inc. in Markham, Ont.
The recent rise in lumber and forest-product equities is due to an equally significant run in lumber and oriented strand board (OSB or particle board) prices over the same period.
Lumber prices have climbed 45% to US$408 per thousand board feet from US$282 in mid-March last year. OSB prices, meanwhile, have doubled to US$430 per one thousand square feet from US$215.
The rise in lumber prices can primarily be attributed to the U.S. housing recovery that continues to gain steam. New home sales during the first two months of this year reached their highest level in more than four years, according to a report released Tuesday by the U.S. Commerce Department.
“At these prices, forest products companies are highly profitable,” said Patricia Mohr, an economist and commodity specialist at Bank of Nova Scotia.
Ms. Mohr said the improving U.S. housing market is still depressed relative to historic levels and should remain a catalyst for lumber prices moving forward.
Supply constraints caused by dozens of sawmill closures from 2006 to 2011 are also supporting prices, as is the ongoing demand from Asia.
While lumber prices could easily fall from current levels over the next few months due to seasonal influences, she expects average prices above US$400 in 2014.
Daryl Swetlishoff, an analyst at Raymond James, said the combination of growing Asian demand, supply constraints and the U.S. housing recovery is resulting in a lumber “super cycle” that is still in its early stages.
“While none of this is to suggest that the one historical mainstay for the lumber industry, volatility, will abate — in terms of future lumber pricing we expect higher-highs and higher-lows and submit that the next pricing peak is yet to come,” he said in a note to clients.
Mr. Swetlishoff recommends investors take advantage of any volatility and add to positions on potential pullbacks in share prices.
At current lumber prices, he sees upside of between 8% and 16% for each of Canfor Corp., West Fraser Timber Co. Ltd. and Western Forest Products Inc., while International Forest Products Ltd. and Conifex Timber Inc. could climb 35% or more over the next 12 months.
If lumber prices continue to rise and hit US$500, a level not reached since 2004, the potential upside ranges from about 50% for Western Forest Products and Canfor to nearly 100% for International Forest Products and Conifex Timber, he said.
Paul Quinn, an analyst at RBC Capital Markets, also sees lucrative opportunities in the sector, but cautions investors that lumber prices can correct quite sharply so he anticipates a better entry point over the next 12 months.
His top pick in the space is International Forest Products because of its favourable geographic mix and inexpensive valuation compared to larger integrated peers Canfor and West Fraser, both of which have sizeable exposure to volatile pulp markets.
Ainsworth Lumber Co. Inc., meanwhile, is expected to outperform its building product peers in a robust North American OSB pricing environment that continues to benefit from strong housing demand in the western U.S.
“We believe 2013 will be the peak year for OSB prices this cycle as markets will remain tight with increased housing demand set to outpace capacity additions,” Mr. Quinn said in a note to clients.
ATTENTION READERSWe See The World From All Sides and Want YOU To Be Fully Informed
In fact, intentional disinformation is a disgraceful scourge in media today. So to assuage any possible errant incorrect information posted herein, we strongly encourage you to seek corroboration from other non-VT sources before forming an educated opinion.
About VT - Policies & Disclosures - Comment Policy