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Investors will be closely watching West Fraser’s outlook

Martin Ellefson, General Manager, of the West Fraser Timber Co. Ltd. lumber mill in Quesnel, B.C. December 16, 2010.

JOHN LEHMANN/THE GLOBE AND MAIL

Canadian lumber producers have been enjoying a welcome upswing thanks to the recovery in the U.S. housing market and strong Asian demand.

However, lumber remains a volatile commodity due to a host of factors that include the supply situation, stumpage fees, rail or boat shipment issues and rail-car shortages.

Prices can correct quite suddenly. For example, the U.S. housing market bounce back is gaining traction but some observers say it is not improving as quickly as had been anticipated, and concerns are also being voiced about Chinese demand.

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At Vancouver-based giant West Fraser Timber Co. Ltd., investors will be closely watching the company's second-quarter earnings outlook – to be unveiled Thursday – given the many external pressures on the sector.

RBC Dominion Securities analyst Paul Quinn recently upgraded West Fraser to outperform from sector perform. Asian demand is "holding up better than some feared," he said in a research report.

"While there has been much talk in the trade of a slowdown in Chinese log/lumber demand, we believe this has been somewhat exaggerated on the lumber side."

B.C. export volumes to China rose 23 per cent month-over-month in May and were 62.4 per cent higher than a year ago, Mr. Quinn notes.

He also sees a strong U.S. housing market recovery.

CIBC World Markets analyst Mark Kennedy is a little less cheery. The rate of improvement in U.S. housing starts is "more gradual than we thought 12 months ago," he said in a recent industry outlook.

And he views Chinese buying as turning more modest on a slowdown in the real estate market and credit contraction.

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West Fraser chief executive Ted Seraphim said in the company's first-quarter conference call that he expects the U.S. housing recovery to be "bumpy."

Expect several years of benchmark lumber prices in the range of $370 (U.S.) per thousand feet board, but a "super cycle" of $450 or higher is unlikely until at least 2017, Mr. Kennedy said.

Mr. Quinn is maintaining his $340 lumber price forecast for 2014, but reducing the 2015 outlook to $365 from $390 and keeping his 2016 pricing assumption at $415.

Mr. Kennedy has an earnings-per-share estimate of 79 cents for the second quarter, while Mr. Quinn anticipates EPS of 82 cents. The analysts' consensus estimate is $1.01.

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About the Author
Quebec Business Correspondent

Bertrand has been covering Quebec business and finance since 2000. Before joining The Globe and Mail in 2000, he was the Toronto-based national business correspondent for Southam News. He has a B.A. from McGill University and a Bachelor of Applied Arts from Ryerson. More

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