Lumber output in focus as prices slip

North American lumber producers are expected to post another quarter of record profits this week, but most attention will be on the outlook, with prices for wood products stumbling and do-it-yourself renovations slowing.

Producers are building and expanding sawmills in the southern U.S., where costs are low and timber is plentiful, while boosting output on expectations that the surge in homebuilding will continue.

Some analysts are cautioning that an oversupply may be building up, even with bottlenecks and supply constraints in British Columbia, Canada's biggest lumber exporter to the U.S.

“We need to see some more supply cuts to rebalance inventories and turn prices around,” said Mark Wilde, a timber and wood products analyst at BMO Capital Markets.

Lumber companies including West Fraser Timber Co. Ltd., Canfor Corp. and Weyerhaeuser Co. have been swimming in cash during the last year due to an unexpected boom in homebuilding and renovations that caused wood prices to quadruple in 12 months and hit record highs in May.

That will result in “the mother of all quarterly returns with record profitability” and revenues that exceed first-quarter results, said Greg Kuta of Westline Capital Strategies Inc.

Lumber prices have since cooled along with a decline in DIY renovations, prompting analysts to anticipate lower quarterly earnings ahead for the producers.

The impact of lower lumber prices and reduced renovations won't be felt until the third quarter, said Kuta, whose Ohio-based firm specializes in lumber-trading strategies.

West Fraser, the world's biggest lumber producer, kicked off the second-quarter earnings season for the industry on Wednesday, reporting earnings that beat analyst estimates.

Montreal-based Resolute Forest Products Inc. on Thursday also posted better-than-expected net profit and sales.