Going out on a limb for lumber stocks

Posted by Rumin Mann
June 6th, 2013

For investors who missed rally, a second chance to get aboard?  

Ticked off because you missed the big rally in lumber stocks that began in the spring of 2012?

Join the club. I missed the surge too, even though I wrote about the improving prospects for lumber back in November, when the sector was barely halfway through its explosive move up.

“Western Canada’s forest products industry is back in gear, riding a rebound in the U.S. housing market and surging lumber prices,” I gushed at the time.

“The turnaround is reflected in the shares of major producers like West Fraser Timber, International Forest Products, Western Forest Products and Ainsworth Lumber. All are up sharply.”

Much to my surprise – and that of some industry analysts, who prematurely predicted an end to the rally at the end of 2012 – the run-up continued until spring. By the time it fizzled out in April, West Fraser’s shares had doubled to nearly $93 apiece, Interfor’s stock soared 140 per cent to $10.80, Canfor almost doubled to $22, and Ainsworth’s stock more than tripled to $4.20.

Then, just as abruptly, the curtain came down. With China’s economy (which now consumes a big chunk of Canada’s lumber exports) slowing and producers restarting lumber mills from Texas to Western Canada, prices slammed into reverse. After gaining more than 40 per cent in 2012, lumber futures on the Chicago Mercantile Exchange (CME) slid by about 30 per cent, from a high of $407 US per thousand board feet in March to a low of just $277 last week.

That prompted analysts to slash their average price forecasts for 2013. The lumber experts at RBC and CIBC now see prices averaging between $350 and $360 per thousand board feet this year, roughly $20 below prior forecasts.

The good news? The correction in lumber prices (and lumber stocks) may already be over. Lumber futures on the CME gained for the third straight day Monday, closing at $310.50 per thousand board feet, a 12 per cent uptick from last week’s lows.
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