The outlook is positive for producers of lumber and improving for paper producers. A drop in supplies amid ongoing demand has raised lumber prices. Rationalization and the development of new products should lift sales for paper producers.
Lumber prices were volatile last year. In 2022, we expect lumber prices to move up from last year’s average. The most important reason is lower supplies. Last year, forest fires in B.C. and the U.S. Northwest hurt the production of lumber. In November, catastrophic floods in B.C. severed its transportation lines to the rest of Canada. This reduced the supplies of lumber to central Canada. Vladimir Putin’s war against Ukraine has led most countries to slap sanctions on Russian lumber. That matters because Russia is the world’s biggest exporter of lumber.
Demand is high for a commodity that’s low in supply
At the same time, demand for lumber remains relatively strong for several reasons. First, Millennials continue to enter the housing market. Second, Canada is welcoming more immigrants. The trouble is, there are too few houses to meet everyone’s needs in the short run. This has driven up house prices, which encourages developers to build more.
Fewer homeowners are listing their houses for sale these days. A lack of houses for sale has reduced sales volume. As a result, the existing housing stock is aging. This creates demand for lumber by supporting repair and remodeling activity. Do-it-yourself shoppers bought more.
Reduce the risk with our 10 buys
One key risk to lumber prices, however, is much higher interest rates. This will make houses less affordable and could slow down real estate markets. This, in turn, could bring down lumber prices. Even so, we have 10 lumber and paper producers that we recommend as buys!
We look for companies that earned a profit in 2021; have a P/E (price-to-earnings) ratio under 10; raise their dividends; have decent operating margins; well priced relative to book value; and have low debt.
This is an edited version of an article that was originally published for subscribers in the May 13, 2022 issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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