July - Sept., 2007
US Lumber Markets
As the U.S. housing slump drags on, the North American lumber industry must reduce production and close some mills permanently to fix its financial mess, said analysts who follow the industry.
Demand for lumber dropped in 2007 from 2006 and will drop again in 2008 largely because of the slowdown in home building, they said.
"We have way too much capacity. Demand is declining," said Paul Quinn, a Vancouver-based paper and forest products analyst at Salman Partners.
"I think just about everybody has looked out for the next 12 months and thought 'it's not going to be pretty'," he said of the lumber companies. "I'm surprised that more Canadian production has not shut down at this point."
Lumber companies probably will close inefficient mills and keep the efficient ones, which can boost production when needed, said Michael Armstrong, a Vancouver-based director in PricewaterhouseCoopers LLC's forest, paper and packaging unit.
Canadian lumber producer Tembec Inc. (TBC.TO: Quote, Profile, Research) said this week it will idle two lumber mills. Earlier this month, giant wood products company Weyerhaeuser Co. (WY.N: Quote, Profile, Research) said the weak market for wood products probably would result in it closing some production facilities.
The industry's troubles have
been reflected in earnings reports of publicly traded lumber companies and more trouble may lie ahead.
"They are going to see a lot of red ink," said Quinn.
The primary culprit for lumber's woes has been the slowdown in home building. Tight credit, due in part to subprime lending crisis, has curbed both building and home buying.
"That is the biggest driver in our industry and it is the culprit," Ashley Boeckholt, a Chicago-based analyst with lumber dealer Bloch Lumber, said of the housing market.
In the United States, ground breaking for new homes fell to a 12-year low in August and building permits, which reflect pending home construction, also fell to a 12-year low.
"I know some of the home builders are pointing to 2009 or 2010 and I think that is probably a reasonable time frame," Paul Latta, director of research at investment services firm McAdams Wright Ragan said.
In addition to fewer homes being built, loan foreclosures due in part to the lending crisis, are putting more homes on the market, said Kevin Binam, director of economic services for the Western Wood Products Association.
"Repair and remodeling is also falling off," said Binam. "All of that has really impacted lumber consumption."
The WWPA estimates lumber use in the United States was down 16 percent during the first six months of this year at 27.4 billion board feet.
Canadian lumber companies have suffered further as their own currency has strengthened against the U.S. dollar, since more than half of Canada's lumber production is shipped to the United States.
"If you are a Canadian producer, you have the U.S. dollar, which is a significant headwind," said Quinn. "They are getting a lot less for the wood."
The weak U.S. dollar has virtually erased the premium Canadian producers earned when they sold wood here and converted the revenue to the Canadian currency.
Historically the U.S. dollar has been stronger than the Canadian dollar. But lately the U.S. dollar has been driven lower due to worries about the weak housing market and recent interest rates cuts. The U.S. currency is now nearly on par with the Canadian dollar.
Source: Reuters