West Fraser CEO sees ‘significant recovery’

The leader of one of Canada’s largest softwood lumber companies believes the beleaguered industry is at the bottom and predicts a “significant rebound” as a result of record low interest rates and cheap housing in the key U.S. market.

VANCOUVER — The leader of one of Canada’s largest softwood lumber companies believes the beleaguered industry is at the bottom and predicts a “significant rebound” as a result of record low interest rates and cheap housing in the key U.S. market.

“It’s really hard for me to believe it can get worse,” Hank Ketcham, chairman, president and CEO of West Fraser Timber Co. Ltd. (TSX:WFT) said Monday.

Ketcham told an investor conference call that lumber prices, currently at 25-year lows, are unsustainable and production cutbacks have been deep.

“I think the industry has gradually downsized itself to the point where — we are not feeling any strength in the market — but I do think we have to be pretty close, at the bottom, that’s what I think.”

In releasing the company’s worsening first-quarter results late last week, Ketcham said while lumber prices have ticked slightly higher in recent weeks, “It’s too early to too early to talk about a recovery.”

“Our markets and the economy in general continue to be fragile and our operating strategy will reflect this.”

But Ketcham said Monday that with housing affordability in the U.S. at its best level in 40 years, and mortgage rates at record lows, the industry should eventually turn around.

“This bodes well for a significant rebound in the market when the inventory of unsold houses reaches a more normal level,” Ketcham said.

About 80 per cent of softwood lumber produced in Canada is delivered to U.S. markets. The industry has been in a slump for more than two years as a result of the housing crash.

Industry statistics show U.S. housing starts averaged 523,000 units in the first quarter, which is down about 20 per cent from the fourth quarter, down 50 per cent from the same time last year, and down 70 per cent from their peak in late 2005.

Paul Quinn, a forestry analyst at RBC Capital Markets, believes the industry is “bottoming.”

He points to more stable housing starts figures in the U.S. in March, compared to February and slightly higher sales.

“That it has stopped falling, that is a good thing,” Quinn said.

However, he said prices are still falling and foreclosures are still rising. A turnaround will also depend on the so-called “stress tests” happening in the U.S. banking sector that will help regulators determine whether they have sufficient capital to weather another economic shock.

The U.S. also has plans to get dodgy mortgages and other toxic assets off banks’ balance sheets, which would put the banks in a better position to lend.

“We are cautiously optimistic that we see that turnaround between now and the summer,” Quinn said.

He said lumber sector stocks could follow suit.

Avrim Lazar, president of the Forest Products Association of Canada, said not only does he think the forestry industry is at bottom, “but the pickup will be faster than most” other industries.

Lazar said that is because inventories have been emptied in recent months, and when demand returns the lack of supply will drive up prices.

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