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West Fraser aims for more Chinese business

A West Fraser grappler at work, Hinton, Alta. West Fraser is aiming for more exports to China. West Fraser Photo

West Fraser

Lumber producer West Fraser Timber is eager to gain relief from the weak U.S. market by further boosting Chinese wood sales, as it comes off the highest export shipments in its history.

The Vancouver-based forestry company said Friday it set a record in the second quarter by shipping more than 30 per cent of its Canadian production to China and Japan.

Soaring demand from China was accompanied by stable sales to Japan.

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"We're excited about this growing market and West Fraser will continue to devote all necessary resources to expand our business in China and throughout Asia," CEO Hank Ketcham said Friday during a conference call.

The increased exports helped to offset weakness in the U.S. housing market, which is expected to continue to pressure lumber prices this year.

The soft housing sector in the United States – West Fraser's traditional export market – contributed to a sharp drop in profits and a 7-per-cent decline in sales in the latest quarter.

Mr. Ketcham said he doesn't see a recovery in the key American market in the near term and expects Chinese consumption of Canadian wood will continue to grow as its economy develops.

"It's certainly taking the pressure off the North American market," he said of China. Chinese demand has helped to increase lumber prices above the lows set in 2009.

West Fraser shares dropped 10 per cent, losing $5.15 and closing at $45.79 Friday on the Toronto Stock Exchange.

After markets closed Thursday, West Fraser reported earnings that failed to meet expectations in the second quarter as net profit plummeted to $10-million from $67-million a year earlier.

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It lost 9 cents per diluted share for the three months ended June 30. That compared to a profit of $1.27 per share in the second quarter of 2010.

Sales shrank nearly 7 per cent to $720-million from $772-million.

Analysts had expected the company to earn 56 cents per share in the period.

Mr. Ketcham said West Fraser's major operating divisions performed well, with the exception of its U.S. sawmills. The company is investing millions of dollars to improve their efficiency.

Pierre Lacroix of Desjardins Capital Markets said the results were disappointing.

"(West Fraser is) not out of the woods as (the) environment suggests caution in the second half of 2011," he wrote in a report.

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He expects market conditions for lumber to improve over the next six to nine months on reduced industry production, slight improvement in U.S. housing and continued Chinese demand.

"The company's long-term growth profile remains compelling, as we expect the shares to double during the next peak in lumber prices," he added.

West Fraser was hurt in the quarter by sharp declines in lumber prices combined with a 17-per-cent increase in Canadian log costs from the prior quarter and a stronger Canadian dollar.

The higher loonie contributed to operating losses in lumber and panel segments. It also prompted U.S. plywood producers to enter the Canadian market.

The company lost a little more than a week of production at its veneer plant and pulp mill in Slave Lake, Alta., after a devastating forest fire destroyed much of the Alberta town.

Meanwhile, Mr. Ketcham said the Western softwood lumber industry is gearing up to defend itself against a complaint filed by the United States.

The U.S. is expected to formally file its petition in early August that will set out its compensation demands. An arbitration is set to take place next February.

"We've got all the forces we have here in Canada working on this and we think we have a strong, strong defence and we're going to defend it right to the end."

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