Forestry stocks face challenges for 2017

The U.S. presidential election has increased protectionist sentiment. This could crimp exports of forestry products to that critical market. This and slower global economic growth are two challenges Canadian lumber and paper producers will face in 2017.

When we last published our forestry stocks survey in May, we wrote: “Most forestry stocks should do better in 2016.” This prediction worked out. In 2017, however, we expect forestry stocks to face challenges. One is growing protectionist sentiment in the U.S.

‘Fair’ lumber trade can hurt

Republican president-elect Donald Trump has attacked trade deals. The TPP (Trans-Pacific Partnership) is effectively dead. Mr. Trump said he’ll either “re-negotiate” NAFTA (North American Free Trade Agreement) or rip it up.

In this environment, the Coalition for Fair Lumber Imports is likely to get a hearing. This U.S. lobby group can make life difficult for Canadian forestry producers. This could hurt the exports, sales and earnings of Canadian lumber producers in 2017. Keep this risk in mind.

A second challenge is slower global economic growth. On the positive side, the American, British, Canadian, Japanese and Chinese economies continue to grow—albeit more slowly than before the financial crisis of 2008. Canada’s recently-concluded trade agreement with the European Union could open up new opportunities for Canadian forestry producers.

Exports to Europe could raise earnings

Until this trade agreement takes effect, the U.S., China and Japan are likely to remain the top three markets for exports of Canadian forestry products.

‘Buy’-rated Western Forest Products says China and Japan are its “key markets”. That’s likely why it’s doing relatively well. The company says Chinese urbanization has created a need to build 20 million new homes a year. Pacific Rim demand for lumber may rise since wood homes are safer than concrete buildings during Asian earthquakes.

Outside of the U.S., policy makers are relying on low interest rates to stimulate their economies and reduce unemployment. Low interest rates, of course, also make housing more affordable. As long as interest rates remain low, we expect demand for housing in both Canada and the U.S. to remain brisk. This, in turn, should increase the demand for lumber.

We expect lumber producers to do well. Particularly with lower oil prices reducing production and shipping costs. That’s why we include lumber producers among our forestry stock buys.

Paper is suffering from structural shifts. The Internet is hurting paper publications. Some have folded. Survivors, such as Newsweek, are often available only online. Even when publications are printed, fewer copies cut the amount of paper needed. Such is the case with The Investment Reporter. Most of our subscribers now receive their issues online.

Canadian producers face other problems. One is Canada’s aging plant and equipment. A second is the pine beetle that’s killing trees in Western Canada. So restrain your enthusiasm for forestry stocks. An experienced and successful investor told us: “I wouldn’t touch forest stocks with a 10-foot pole.”

If you want to diversify your portfolio, we rate five of a dozen producers ‘buys’. The ‘buys’ are Acadian Timber (TSX—ADN), Canfor Pulp Products (TSX—CFX), Cascades Inc. (TSX—CAS), West Fraser Timber (TSX—WFT) and Western Forest Products (TSX—WEF). Just remember that forestry stocks are often seen as trading buys as opposed to buy-and-hold investments.

 

The Investment Reporter, MPL Communications Inc.
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