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.
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