OTTAWA — Better times lie ahead for Canada’s long-suffering lumber industry, whose decade-long restructuring has left it a lean competitor poised for an upturn in the U.S. housing market.
The caveat in that analysis, released by TD Economics on Thursday, is that it will be another year and a half before the housing recovery kicks in.
“Patience is a virtue for this beleaguered sector,” economist Leslie Preston said in the report, which shows that while there have been cyclical gains in other resource sectors, the lumber industry still faces prices 36 per cent lower than previous cycle highs.
But once the foreclosure glut winds down and a U.S. housing recovery kicks in toward the end of 2013, it will drive an upswing in lumber demand and prices as a result of a “far leaner capacity” at the mill level.
The turnaround will be abetted by rapidly growing demand from China, which has grown in recent years into a significant importer of Canadian lumber, particularly that produced in B.C., the report states.
China’s share of Canadian exports has soared from one per cent in 2006 to 20 per cent today. The fact that lumber prices are higher now than they would have been at this stage in the U.S. housing cycle has been dubbed by observers as “The China Effect.”
At the same time, the Canadian industry has shut down its least productive mills. Further capacity reductions are expected to occur this year. Increased output since the recession despite slightly lower employment suggests further productivity improvements are taking hold.
“Add it all up, and the combination of firmer prices and a more competitive industry in Canada paints a very positive picture for profits in 2013 and beyond,” Preston said.
In the meantime, Preston said benchmark prices are not expected to rise above $300 U.S. per thousand board feet on a sustained basis before 2013. They are now trading in the $220 range.