Canfor sees future in lumber shipments to China

The deep economic downturn that cut U.S. demand for Canadian lumber significantly for several years has had an upside for Canfor Corp., which turned its focus to Asia and discovered "exponential growth" during the first quarter.

"There so many opportunities in China, it's really a stretch of the imagination," Canfor's president and chief executive Jim Shepard said Friday.

The Vancouver-based lumber producer (TSX:CFP) shipped about 25 per cent of its products offshore during the first quarter — about half of that going to China — while 20 per cent was used domestically and the rest bound for the U.S.

It reported $15.6 million of net income attributable to shareholders, or 11 cents per share, in the first quarter. In the first quarter of 2009, the net loss attributable to shareholders was $58.8 million or 41 cents per share.

Quarterly sales were $577.9 million in the first quarter of 2010, up from $474.7 million in the year earlier period, which marked the low point of the 2008-9 recession for Canada.

Shepard said there is a "growing Asian appetite" for higher grades of lumber, adding that as China develops its urban centres, it will emerge as a dominant market for lumber in the next ten years.

"We continue to focus on what the most opportunistic ways will be for shipping our product there," Shepard said.

"And while we're doing that, the net effect is that we're taking a considerable amount of volume off the North American market and that's certainly having a positive impact on lumber prices."

Canadian forestry companies are beginning to re-open mills and recall workers who were laid off during the downturn, when producers cut costs to cope with a drop in demand in the U.S. house construction market.

The shutdowns, along with problems faced by international competitors — from an earthquake in Chile to a port strike in Finland — have constrained the supply of wood products, resulting in a global shortage that drove lumber prices up 30 per cent in the first quarter.

Lumber prices in March were so high that export duty rates on shipments from Canada to the United States will drop from 15 per cent to 10 per cent on May 1_ marking the first time prices reached the threshold since the Softwood Lumber Agreement between the U.S. and Canada came into effect in 2006.

"I'd like to say we are at the beginning of the end, but that remains to be seen. I do, however, genuinely feel that we are past the worst of it and we came through in one piece and in good shape," Shepard said.

He added that it's still unclear whether the current spike will be permanent because it is driven by temporary supply constraints rather than sustained demand.

Shepard said he remains cautious about the immediate future because the ongoing downturn in the U.S. housing market continues to take a toll on Canfor's financial performance.

Housing starts in the U.S. remain under 600,000, well below a peak of two million in 2005 and a more normalized annual range of 1.2 million to 1.6 million starts a year.

"There may be rays of sunlight shining right now, but there are still some clouds in the horizon, particularly in the United States, like the expected continuation of home mortgage foreclosures and the constraining high unemployment numbers," he said.

"For these reasons we continue to be focused on growing our offshore markets"

Shepard said the company emerged from the downturn with a strong balance sheet that will enable it to modernize its facilities and take advantage of growth opportunities.

The company operated at 60 per cent capacity in the first quarter and said it will bring on new capacity if and when demand warrants it.

Earlier this week, the company announced it was adding a third shift at its Polar division planer mill in the north-central B.C. community of Bear Lake.

Canfor also added a second shift at a sawmill in Mackenzie in February and also has plans to re-open its Chetwynd sawmill next month. Both are located in northeastern B.C.

Shares in Canfor gained 33 cents, or three per cent, trading at $10.43 apiece Friday afternoon on the Toronto Stock Exchange.