Lumber Prices Slip Further Downward

So far the strike at BC's coastal sawmills is having little impact on the North American lumber market. This is traditionally a time of strong homebuilding activity; were the US housing market not at a 10-year low, lumber producers would be jacking up prices to take advantage of potential shortage of supply. Instead, this year is following in the tracks of 2006 (and giving a gloomy prediction for 2008) with so few housing starts and even fewer permit applications, that mills and wholesalers must keep cutting prices just to keep product moving.

Even futures, prone to emotional reactions to even a figment of threat to supply, closed lower at the end of last week due to a poor cash market.

For dimension, benchmark WSPF 2x4#2&btr fell by US$13 to US$260 per thousand board feet (down US$20 from one year ago). The panel market rallied slightly half-way through this summer, but even benchmark Toronto 7/16" OSB fell by US$20 to US$175 per thousand square feet (down from US$185 one year ago).

Canadian mills have been struggling with a rising Canadian dollar, an abysmal US housing market, increased international competition (particularly in pulp), high energy and staff costs, and the devestation caused by the mountain pine beetle in BC (now with a frighteningly growing presence in Alberta). Quarterly results are coming out, with only dismal reports.

Canfor fared by far the worst, with 2Q 2007 loss of C$39 million (compared to a profit of C$40 million for the same period last year). West Fraser reported a 2Q loss of C$14 million (compared to a gain of C$105 million for the same period last year), while Interfor lost only C$3.5 million (compared to C$8 million in profits for the same period last year).

Both Canfor and West Fraser made large mill purchases in 2006; Canfor's decisions proved unwise (part of the cause for the ugly battle of control for Canfor's Board of Director's earlier this year) while West Fraser's have turned out to be largely profitable.

Given the continuing unveiling of horror stories of the collapse of the US "zero-interest" mortgage market, with various securities companies and banks launching suits on each other, in addition to record numbers of unsold homes in vital US markets (Arizona, Florida, California), it does not seem that Canadian lumber producers can start looking towards a brighter future before 3Q 2008 at the soonest.

The next couple of days will tell if the coastal forestry workers strike has been settled; it will have come and gone causing hardly a blip in the lumber market landscape.