Raging Bull

It was standing room only for the North American Wholesale Lumber Association’s Regional Meeting in Vancouver yesterday. Daryl Swetlishoff, Senior Managing Director of Equity Research at Raymond James, was the second of three speakers. Many in attendance first heard Daryl speak three years ago at the NAWLA Regional. They were back, anxious for an update. It’s been said here before, but Daryl is somewhat of a rock star in forest equities circles. Against a backdrop of chaotic markets this week, his surefire outlook was as energizing as the cool breeze blowing through the windows of the Grand Ballroom. A summary from my scribbles:

Lumber Market

  • Acknowledged market volatility at present – “2015 is when we’ll see an ‘inflection point’ in the lumber market”
  • Illustrated lumber price sensitivity to U.S. housing and net exports – boils down to “a one-dimensional problem.. the only call you’re making is can housing get a little better in the U.S… where’s the lumber going to come from?”
  • Anticipated better activity while also improved rail car supply in Q2 – unsure how that will play out
  • Suggested he’s not nearly as bullish on OSB – “we don’t have the same conviction (on OSB) as we do on lumber”


U.S. Housing Market

  • Said he anticipates a better spring selling season than feared, while noting the market lacks a sense of urgency compared to last year – sees more activity in higher-end properties/communities
  • Pointed to three bullish factors: residential spending has improved, affordability is normalizing, and listed “for sale” inventory remains near record low levels
  • Noted “first time buyers still left out of the party” = pent up demand
  • Illustrated how new home sales by price segment key to higher activity ahead
  • Illustrated macro housing conditions required for trend housing starts of 1.44 million units – “I have faith we’re going to get there”
  • Forecasted 1.09 million starts this year, 1.22 million in 2015, and 1.44 million in 2016


Forestry Stocks

  • “I love this industry because there are so few people paying attention to it” – of eight analysts, “only four are paying attention”
  • “Building materials stock have attractive valuations”
  • Illustrated seasonal trades over the past four years
  • “West Fraser is 15% off the high.. we’ve already felt the impact of the seasonal trough.. stocks have already corrected”
  • “My advice is to step in and start buying now while there is liquidity”
  • “Stocks have gone up 250% since the last time I was here, and there’s still a lot of upside”
  • “Whether or not you buy Interfor (back) at $14.75 or $15, it’s going to $30”
  • Said prospective investor response typically “Really? All I have to bet on is the U.S. housing market getting better?”


Recipes and Analysts

After reaching skyward over the past two years, lumber stocks are suddenly getting (ahem) nailed, begins this report in the Edmonton Journal. The report goes on to accurately explain “the recipe for real pain”:

“First, the harshest winter weather in a century slammed parts of the U.S. Midwest and Northeast, cutting into construction activity. Second, a nasty six-week strike at Port Metro Vancouver, on top of ongoing railcar shortages in Western Canada, slashed some lumber producers’ shipments by double digits. Third, investors are rattled by growing talk that the U.S. housing rebound could stall, as home prices pick up and U.S. mortgage rates rise.”

I had an opportunity to talk with Mark Kennedy at CIBC yesterday. Mark said it was “too early to tell” if winter’s bite will see U.S. housing starts fall short of his 1.1 million forecast. Mark is quoted throughout the article, noting that 1.1 million starts is still 25% below the long term average. He suggests current weakness is a buying opportunity. Many will be looking forward to hearing Daryl Swetlishoff’s outlook this afternoon at the NAWLA Regional Meeting here in Vancouver. Well-known in industry circles, the Senior Managing Director, Equity Reseach at Raymond James is author of The Peak Lumber Theory and Super Cycle Thesis, published March 29. 2010.

Markets Meeting..

Last evening over dinner I had the privilege of reaffirming valued connection with Mark Kennedy, Executive Director, Forest Products Equity Research at CIBC World Markets. Mark was in Vancouver ahead of CIBC’s 17th Annual Whistler Institutional Investor Conference, happening tomorrow through Saturday at the Fairmont Chateau Whistler. This prestigious conference is invitation only, with presentations from over 90 prominent North American companies forming the agenda. The forest products component will feature senior executives presenting from Interfor, Conifex, Western Forest, West Fraser, and Canfor.

Mark described the U.S. housing market as “red hot” in 2013, while suggesting growth will continue more gradually in 2014. He emphasized that new home building in the U.S. is occurring at a much lower rate than fundamental long-term demand. In anticipation of a strong North American lumber market through 2015, Mark continues to recommend building products equities, including CFP, WFT, IFP.A, WEF, CFF, and NBD.

I also had the pleasure of meeting Andrey Omelchak, Portfolio Manager at Montrusco Bolton Investments, and Ali Qureshi, Institutional Equity Sales at CIBC World Markets. Evidence of fragility in all market elements these days came to the fore in the lively exchange of questions streaming between financial markets expertise and a lumber trader’s cash-wood implication interests.


With Mark Kennedy, 1-21-14

China Effect?

I read with interest an October 8th post at stockhouse.com here. In stark contrast to Q2’s “earnings beat parade”, it’s reported that at least one stock analyst expects lumber company earnings to underwhelm in Q3. Pointing to the resistance evident in China to current prices, we’re told that lumber supply could be backing up in North America. The expectation, according to the article, is that “lagging pricing on offshore lumber shipments will result in negative earnings revisions and earnings misses”. B.C. stumpage rate increases and the U.S. export tax are also cited as contributing factors to the weaker outlook.

Earlier today I asked Mark Kennedy at CIBC for his take on the “China Effect”. Mark tempered the negative outlook in the article, arguing “the bigger question is what will demand in China be in 2014?” He said that shipments offshore are projected to at least match, and perhaps even surpass, 2013. In the face of the surprising surge in China’s forest products imports earlier this summer, that’s saying something.

Closer to home, Mark anticipates the gradual improvement in the U.S. housing market will continue, leading to a strong North American lumber market through 2015. He cautioned that short term, the current U.S. government shutdown could begin to take a bite out of U.S. housing market activity.

Updated 10/15:

China Forest Products Import Data Released for September (CIBC)

Lumber – In September 2013 China imported 2,200,000 m3 of lumber at an average cost of $279 per m3. Lumber imports are up 31.7% compared to Sept. 2012 when they were 1,670,000 m3. YTD lumber imports are 17.540 million m3 compared to 15.260 million m3 in the prior period (up 14.9%).

Logs – In September 2013 China imported 4,270,000 m3 of logs at an average price of $204 per m3. Log imports are up 30.2% compared to Sept. 2012 when they were 3,280,000 m3. YTD log imports are 33.260 million m3 compared to 28.570 million m3 in the prior period (up 16.4%).

Got 2×10?

On July 22nd, Sober Look noted how back in the spring of this year, the large decline in lumber futures preceded weaker than expected U.S. residential construction activity in June. With lumber as a leading indicator in mind, their post here asked if the steady increase in lumber prices in July suggested a boost in building. Based largely on the Homebuilders’ survey (highest levels since 2006), they concluded “many economists think so”.

So, is construction picking up steam in the U.S.? I posed that question yesterday to Mark Kennedy, Executive Director, CIBC Forest Products Equity Research. “The lumber stocks say yes (West Fraser, Canfor, Interfor – all near their 52 week highs), but someone forgot to tell the futures market!” said Mark, pointing to the recent pullback with prices in most contracts hitting four-week lows Monday. Traders will certainly be tuned to the data: seasonally adjusted annual housing starts and permits for July will be released August 16th.


It was winter 2000. Bob Leffler and I were safely through security into the departure lounge at YVR for an early morning flight to Boston, and the Northeastern Retail Lumber Association’s Lumber and Building Material Expo. We were at ease over a raft of outstanding quotations against hard-won inquiries that seemingly posed little risk in a market that lay dormant. That is, until Bob’s cell phone suddenly came alive. Overnight lumber markets had caught on fire! The deftness with which Bob escaped incoming P.O.’s – unscathed from dangers posed by outstanding quotes – was a thing of beauty. In the process, all customer relationships were preserved with integrity. The essence of timing as a factor in such things is something any lumber trader can appreciate. Threats and anxieties diffused, we laughed about it at 32,000 ft over spicy Caesars. I had attended “The Boston Show” several times before and would go several more times in the years that followed. But this trip is the one I’ll always remember. Bob got his start in the business at his dad’s lumber yard in Vancouver, Leonard Building Supplies. In 1972 he joined Pacific Overland Timber, where he worked under mentors George Cruickshank and Len Mayes, before joining Taiga in 1974. After 39 years, many of those as an influential supplier to the Northeast market, Bob announced his retirement this week, effective September 30th.

“Don’t look back.. you’re not going that way.”

Policy, Projections, and a Pool

As we approach the middle of July, the week comes to an end with continuing uncertainties surrounding mill pricing policies for August shipments. For the first time this year, there will be an export charge (effective August 1st) on Canadian softwood lumber shipments to the United States. With that in mind, the uptick in market activity of late is certainly being tempered by heightened trader caution in anticipation of a duty discount for Canada vs. higher mill nets available offshore. Meanwhile, with nary a mention of pending export charges, nevermind the epic Q2 lumber and panel market implosion, the reported macro picture remains bullish as ever. Bloomberg explains here that lumber futures have rallied to a seven-week high on speculation that North American mills are slowing output as demand increases from homebuilders in the U.S. and China. Daryl Swetlishoff tells us here in The Financial Post “The U.S. housing market continues to improve, we reiterate our expectation of a lumber price trend of higher highs and higher lows punctuated by periods of volatility, as has been the case thus far in 2013.” He adds that even conservative forecasts for U.S. housing activity in 2014 point to higher lumber prices. Mark Kennedy at CIBC notes takeaway in the U.S. market continues to improve, “particularly in northern states where wet weather has been holding building activity back.” And while WSPF prices are presently $310/M, Mark continues to carry an expected $350/M average lumber price for Q3, acknowledging these expectations may be $10-20 too high. “We will see how the balance of July pricing evolves before adjusting our estimates,” says Mark in his preliminary Q2 report released today.
With the August export charge looming, one thing’s for certain; confusion ‘on the ground’ will continue. Don’t turn that channel?!


We took our little ones to beautiful Kits pool Wednesday late in the afternoon for a fun time of swimming. When we were back in the car to go home, my three-year-old Lauren was not too pleased about leaving the pool, complaining a bit.. a few tears.. before recomposing herself and asking from the car seat in the back: “Daddy, when I grow up, will I still be a girl?” I guess in this modern era I could have responded with “If you want to.. ?”

“Round Trip”

Last month, the monthly Random Lengths Framing Lumber Composite Price returned to pre-Superstorm Sandy levels, triggering a 10% border tax for August. “It is becoming increasingly difficult to square the sharp drop in lumber prices with the ongoing surge in U.S. homebuilder stocks,” grumbles Scott Barlow at The Globe and Mail. In a post entitled If U.S. Housing’s back, Where is Lumber?, Barlow asks “if the future’s so bright, how do we explain Scotia Capital analyst Benoît Laprade’s recent downward revision in his lumber price forecast in light of ‘unexpected weakness’”? While the author points out that virtually every analyst remains bullish on forestry stocks, he concludes “it is highly unlikely that a new housing boom is on the horizon.” Traders meanwhile will be closely monitoring an improved tone in U.S. lumber markets in evidence over the past ten days.
Made By www.DiyChart.com

Bottom of the third?

In an interview earlier this month with Bloomberg, West Fraser CFO Larry Hughes suggests part of the reason for the steep decline in lumber prices this year was that they rose too quickly late in 2012 and into the first quarter. He points out, in the full story here, that blogs about the lumber industry “were full of fear of (fibre) shortages” back in January.

More recently, discussion surrounding the scarcity of fibre supply has become more muted. And while the U.S. housing picture continues to look positive, the lumber market collapse this spring serves to remind it’s a global play now – as compared with years ago when it seemed all the analysis was predicated primarily on the U.S. housing market. When prices climb, lumber as a commodity finds extra supply available: mills reopen,  add shifts, build more mills, areas that were too remote to haul timber from become more economical etc etc.  .. And that’s just here in B.C.!

Still, the bullish headlines keep coming. For example, The Globe and Mail declares the lumber super cycle is now imminent (is it fair to characterize “by the end of 2014” imminent?). More than one forestry stock analyst has told us “If this is a baseball game, we’re in the third inning.” Traders certainly hope this is a game where the realities match the hype.


“Clean-up Blogger” – Little League at Trafalgar Park, Vancouver (197_?)

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.

COFI Convention

convention_blog_article_imageThe Prince George Citizen reports “As the Council of Forest Industries sets up their first fully restored wood sector conference since the global economic crash, lumber prices are soaring to unprecedented values. When COFI opens the doors of the Prince George Civic Centre on Thursday and Friday, it will be packed with exhibitors (many hopeful exhibitors couldn’t get a spot) and an A-list of stage presenters..”
See: Lumber prices on upward swing as conference gets underway

In consideration of important issues confronting the forest industry these days – all in build-up to provincial election on the horizon – attendees will be particularly interested in hearing from B.C. Premier Christy Clark and NDP challenger Adrian Dix. In other talks scheduled this Thursday and Friday in Prince George, a panel discussion to address timber supply will include the province’s Chief Forester, Dave Peterson. And a Global Macro Economics session features the always informative Daryl Swetlishoff, Sr. Managing Director, Equity Research at Raymond James. I’ll be there to catch all the action. The jam-packed program is available here.