OTTAWA — There is a light at the end of the tunnel for the Canadian
lumber industry, TD Bank says in a report, suggesting that growing
demand from China and a recovery in the U.S. homebuilding market will
come late in 2013.

TD economist Leslie Preston said patience will pay off for the sector
that is suffering with prices still 36 per cent below the previous
cyclical highs, despite gains in other commodities.

``Moreover, after considerable restructuring over the past ten years,
the lumber sector is leaner and more competitive,’’ TD economist Leslie
Preston wrote in a report Thursday.

``We expect further capacity reductions this year, setting the stage for
an upswing in prices once U.S. demand starts coming back on stream.’’


The sector was hammered as the bottom fell out of the U.S. homebuilding
market and demand evaporated in the wake of the financial crisis.

Shares of Canada’s big lumber producers had been heading higher in the
spring, but fell off sharply after it became clear the U.S. economic
recovery would be slower than expected.

Since the downturn in the U.S. market, the companies have looked to Asian markets and B.C. producers have benefited.

The Canadian firms, with the help of the B.C. and federal government,
have worked to promote the use of wood in construction in China which
traditionally has not used wood frame building techniques.

Canfor (TSX:CFP) CEO Don Kayne said earlier this year that he believed
the industry could double the volume of wood going to China over the
next five years, while West Fraser Timber (TSX:WFT) CEO Hank Ketcham
said in July that his company set a record in the second quarter by
shipping more than 30 per cent of its Canadian production to China and

The TD report said China now imports more lumber from B.C. than from the
United States and anecdotally the B.C. government estimates that the
U.S. and China each account for about 40 per cent of the province’s
lumber production.

``Healthy demand growth from China is expected to continue over the
medium term. Analysts expect China’s imports of wood products to grow at
10 per cent per year through 2015, and those are deemed conservative
estimates,’’ Preston wrote.

The industry has also honed its competitive edge, especially in B.C., home to some of North America’s lowest cost producers.

Canfor, Canada’s biggest lumber producer, is in the midst of a
three-year plan to spend $300 million on sawmill improvement projects to
increase productivity and efficiency.

However, Preston noted that the fortunes of the lumber market still depend on the recovery of the U.S. homebuilding market.

At its peak, the U.S. market hit a pace of more than two million housing
starts per year and lumber prices were north of $400 per 1,000 board

Lumber prices averaged around $269 per 1,000 board feet in August, while
the U.S. Commerce Department reported builders broke ground on a
seasonally adjusted 571,000 homes, a three month low.

``Chinese demand may have kept mills running, but low capacity use rates
mean there is little scope for higher prices until improved demand from
our biggest customer starts filling order books,’’ Preston wrote.

``The U.S. is still our number one market, accounting for roughly 60 per
cent of Canadian lumber exports in 2010 despite the housing downturn.
The share has fallen from a recent peak of 83 per cent in 2005, but the
importance of a recovery in U.S. demand to Canada’s lumber industry
remains crucial.’’

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