Some analysts are predicting growth for Canadian forestry. Although the industry has long been an underdog, many factors are converging to support higher prices in the years ahead.
Canaccord Genuity has a bullish outlook on the lumber market for mid- to late-2011 and 2012. It believes supply-side constraints, such as the implications of the mountain pine beetle in Western Canada, will help drive up prices later in 2011.
The gradual U.S. housing recovery offers a source of export growth because 25% of the demand for Canada’s lumber is derived from U.S. home-remodelling needs, and that figure is expected to turn up sharply in 2011.
According to Canaccord Genuity, increased exports to Asia should also absorb available Canadian lumber. B.C. government statistics indicate that Canadian offshore export shipments this year are growing at 34%. China is one of the biggest drivers of Asian growth and in January 2011 shipments of B.C. softwood lumber to China were double the volume shipped a year earlier.
According to analysts for TD Newcrest, a division of TD Securities Inc., China has surpassed Japan as the largest export market for North American lumber – acquiring 46.3% from North American offshore exports. Although China uses lumber primarily for industrial applications, TD believes there is significant room for growth in the wood-frame housing market.
Earlier this year, the B.C. government was in Beijing showing an energy-efficient modular building to promote the advantages of wood construction in the mid-rise residential buildings that form 70% of China’s housing development. In this walk-up apartment sector, China averages up to seven million housing starts annually.
According to RBC analysts, Canada was the largest supplier of lumber to Japan in 2010, with 38% of that country’s total softwood lumber imports. The Japan earthquake and tsunami will also affect the industry. Japan will have to rebuild, and its reconstruction efforts, while possibly long range, will include Canadian lumber.
Wood-frame construction has many earthquake-tolerant properties and wood is a material of choice for Japanese builders.
In its 2010 review, PwC says the global forestry industry should see a rise in the number of mergers and acquisitions attuned to growth as markets evolve.
It points to consolidation in the industry, geographical diversification into new growth markets, repositioning and a flow of institutional money into timberlands.
The forestry industry has direct benefits for investors. Timber has traditionally been a good hedge against inflation and has provided stable risk-adjusted returns.
As well, many forestry companies offer decent shareholder dividends.
Investors wanting exposure to the forestry sector have a number of options. For broad exposure, they can opt for exchange-traded funds. The iShares S&P Global Timer & Forestry Index Fund (NYSE: WOOD) provides diversified exposure primarily through the U.S. and Canada.
For more targeted exposure, investors can look at individual companies. Canaccord Genuity analysts prefer AbitibiBowater Inc. (TSX: ABH) and Fortress Paper Ltd. (TSX: FTP) in the pulp and paper sector and EACOM Timber Corp. (TSXV: ETR) in the lumber sector.
