Forestry stocks lumber on after hit
U. S. President Donald Trump’s latest target in the world of trade — Canada’s softwood lumber industry — has taken new tariffs from the U. S. Commerce Department in stride, at least when it comes to share price movements.
Countervailing duties ( CVDs) will be imposed on Canadian lumber producers for shipments to the U. S. beginning on May 1.
Five c ompanies were named in the Department of Commerce’s (DoC) investigation with rates ranging from 24.12 per cent to 3.02 per cent: West Fraser Timber Co. Ltd., Canfor Corp. and Resolute Forest Products Inc., along with privately owned Tolko Industries Ltd. and J.D. Irving Ltd.
While the duties are retroactive going back 90 days for the majority of the industry, the five named companies were exempted.
At an average rate of 19.88 per cent for the companies not singled out, the CVDs are below what some analysts had anticipated, which partly explains why Canadian lumber stocks haven’t been hurt. In fact, some are up since Tuesday’s announcement.
Paul Quinn, a Vancouverbased analyst at RBC Capital Markets, expressed surprise at the DoC’s creativity, and thinks the investigated companies were excluded from retroactive duties as that was the only way to come up with a 15 per cent hike in Canadian lumber shipments.
“We note that this is a preliminary determination and we continue to believe that odds are slim that retroactive duties will be applied when the final rates are announced,” Quinn said in a note to clients.
Even though share price movements in the sector have been limited, some winners and losers should emerge.
Resolute has t he l owest preliminary CVD rate among its peers at 12.82 per cent, so Quinn considers the news a relative positive for the company.
The analyst noted that all of Resolute’s l umber capacity is in Canada, and roughly half of i ts shipments go to the U. S. As a result, the DoC’s decision should “still be viewed as a negative overall.”
West Fraser, meanwhile, with the highest rate ( as expected) at 24.12 per cent, should see t he greatest near-term impact.
While t he i nitial rate wasn’t surprising, retroactive duties assessed make the DoC’s announcement a clear negative for much of the Canadian industry. That includes other companies not named such as Conifex Timber Inc., Interfor Corp, Tembec Inc. and Western Forest Products Inc.
However, Quinn noted that the initial rate determined by the DoC in previous CVD investigations arising from the softwood lumber dispute have all been reduced after the final rates were determined. The balance of the duties were returned to the affected companies.
“As such, while we expect this initial determination will be a headwind for Canadian producers in the short- term, we expect the impact will be less significant in the medium- term ( as final rates come in lower), and even less so in the long- term after a new Softwood Lumber Agreement is formed,” the analyst said.
Investors should also keep in mind that the Canadian paper and forest products industry continues to benefit from strong underlying fundamentals.
Brian Belski, chief investment strategist at BMO Capital Markets, believes this will support consistent outperformance for the sector.
“Our primary investment strategy theme for 2017 has been for investors to overweight analysis and underweight rhetoric,” Belski said in a report. “In our view, the recent trends within paper & forest products ( fundamentals greater than noise) are a great example.”
He highlighted steady gains in U.S. housing construction, as well as the sector’s attractive valuation, very healthy balance sheets, above- average profitability, and the highest cash flow generation since 2007.
“Even after we adjust for the recent softwood lumber duties, steadily increasing U.S. residential construction demand, plus upward trending lumber prices, plus a stronger U.S. dollar, equals rising sales growth,” Belski said.