COFI Convention Report Part 2: Global Macro Economics and the Coming Super Cycle

This panel session of particular interest focused on “the economic risks and opportunities for the B.C. forest industry in the face of changing global commodity markets, shifts within the solid wood products sector, and the expected lumber ‘super cycle’.” Moderator Ken Shields, President & CEO of Conifex, introduced the three presenters:

Russ Taylor, President – International Wood Markets Group
Russ Taylor examined many global trends and perspectives with the help of detailed charts. He illustrated how we’re headed toward an imbalance between supply (from Canada, Russia, and Europe) and demand (primarily China and the U.S.). One chart clearly indicated how closely lumber prices in China and Japan are now tied to the U.S. market. In answer to the question on some people’s minds “Are we running out of wood?” Russ suggested that while we are not running out of wood, the supply shortage in the short term is real. In fact Russ reports that between 2006 and 2009, lumber supply across North America was reduced by 50%. He also acknowledged that higher prices will ultimately attract more timber in the form of “higher cost producers” and that this “incremental supply option” is limited to Europe. Russ talked about the challenges of a global “fractured supply chain” particularly with U.S. markets in recovery mode. Wood Markets’ forecast calls for U.S. housing starts to grow 20+ per cent per year to 2017. Russ cautioned that sustained demand is key to the “super cycle” thesis, while noting supply side dynamics “are the only thing that’s not changing” in the short term. He sees higher and more volatile lumber prices in the future.

Peter Woodbridge, President – Woodbridge Associates
Peter touched on many of the same themes as Russ from a supply chain perspective. He felt that Pro Dealers will ultimately be the innovators where the fragmented supply chain solutions are concerned. His presentation looked closely at the impact of supply constraints and higher prices on U.S. homebuilders. As the U.S. housing market recovers, Peter questioned the ability for homebuilders to pass-thru rising costs. He suggested we’ll see “substitutes” in building materials as a result, including more engineered alternatives. It was particularly interesting to hear that Woodbridge Associates’ forecast for U.S. housing starts includes a dip next year: .950 million starts in 2013, .925 in 2014, 1.125 in 2015, and 1.575 in 2016. Peter noted China’s preference for wood fibre is Russia first, followed by B.C., the Pacific NW, and New Zealand (Radiata Pine). Peter concluded that record high solid sawn lumber prices by 2015-2016 will be a net negative for our customers – homebuilders in particular. He notes the U.S. homebuilder is involved in much more than home construction, including land development and financing. He noted the shortage of building lots in the U.S. at moment. He said all these supply chain constraints will lead to building better (green) but cheaper (per square foot).

Daryl Swetlishoff, Sr. Managing Director, Equity Research – Raymond James Ltd.
Daryl is somewhat of a rock star in forest equities circles. When he took the microphone, you could sense the crowded auditorium shifted toward the edge of their seats. Daryl opened his presentation by calmly stating that his job was to identify opportunities for investors to make money. He acknowledged that in recent months he’s gone from being a Maytag repairman to having never been busier. By now industry is well-familiar with Daryl Swetlishoff’s Peak Lumber Theory and Super Cycle Thesis published March 29, 2010 and discussed at NAWLA Vancouver 2011. In fact his having originally coined the term “super cycle” spoke for itself; he clearly didn’t feel the need to rehash his thesis on this day. What he did do however, was explain how his time-tested “seasonal trade” in forestry stocks (buy in the fall, sell in the spring) shifted to a secular trade. By spring 2012, when signs of life were evident in the U.S. housing market input data for his complex forecasting models, he was no seller. His chart illustrating lumber price sensitivity to U.S. housing starts and net offshore exports was less revealing than his chart illustrating lumber company stock price sensitivity to changes in benchmark WSPF 2×4 lumber prices. To confront a question on the minds of many, Daryl published “Did I Miss the Trade?” Feb 27, 2013. He confirmed again in Prince George “No. It’s not done”. He still forecasts “a lot of upside” in forestry stocks while at the same time hinting of a possible summer buying opportunity. A significant risk factor is rising cost of timber. I approached Daryl after his presentation with a couple of questions, and also had the good fortune of sitting next to him at the luncheon that followed. The opportunity to share one-on-one with Daryl proved to be enlightening – even surprising – to note a successful forest analyst’s demonstrated interest in one lumber trader’s perspective of happenings on the ground.

Tomorrow I’ll complete my report on the COFI Convention with Part 3: Timber Supply.

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