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Housing starts less robust than expected

CIBC analysts Hamir Patel and Roshni Luthra continue to expect lumber and OSB prices to moderate in 2022 as record profitability incentivizes more capacity.

lumber_industry

CIBC analysts Hamir Patel and Roshni Luthra cover Canada’s lumber industry from Vancouver.

US housing starts decreased by nine per cent month-over-month in April (although they were up 67 per cent year-over-year) to a seasonally adjusted annual rate (SAAR) of 1.569 million (compared to the consensus of 1.704 million and CIBC Economics at 1.675 million).

This was below the revised March figure of 1.733 million (down from the initial estimate of 1.739 million). Single-family starts were 1.087 million (down 13 per cent month-over-month but 59 per cent higher year-over-year), while multi-family units contributed 482,000 starts for the month (a one per cent improvement from the previous month and 91 per cent higher than a year ago).

Single-family starts generally use three times as much lumber and OSB (oriented strand board, a type of engineered wood) as multi-family starts. Building permits were largely flat compared to March at 1.760 million (up 61 per cent year-over-year), above CIBC Economics’ forecast of 1.725 million but below consensus of 1.771 million.

CIBC Economics pointed to shortages of materials (particularly lumber) as well as potential labour challenges weighing on single-family building activity.

Builder confidence flat from April in May

The National Association of Home Builders (NAHB) and Wells Fargo’s Housing Market Index (HMI) recently reported continued strong builder confidence, with the indicator for newly built single-family homes steady month-over-month at 83 in May.

The HMI assessed that current sales conditions were flat month-over-month at 88, while the factor measuring sales expectations over the next six months rose one point to 81.

The component that measures traffic of potential buyers was down one point to 73.

Redfin reports ongoing US housing strength

According to Seattle-based real estate brokerage Redfin, the median home sales price rose 22 per cent year-over-year for the four-week period ending May 9 to an all-time high of US$351,000.

Compared to 2020, the average sales-to-list price ratio, measuring how close homes are selling to their asking prices, increased slightly to an all-time high of 101.5 per cent (2.9 per cent higher than a year ago).

Active listings were down 48 per cent compared to the same period in 2019 (a more applicable comparison to make for inventory given COVID disruptions last year).

Our top pick under these circumstances remains West Fraser Timber Co. Ltd. (TSX—WFG; NYSE—WFG). Our other “outperformer” wood products names include Canfor Corporation (TSX—CFP), Doman Building Materials Group Ltd. (formerly CanWel Building Materials Group Ltd.) (TSX—DBM), Interfor Corporation (TSX—IFP), Resolute Forest Products Inc. (TSX—RFP; NYSE—RFP) and Western Forest Products Inc. (TSX—WEF).

Strong prices should moderate in 2022

Our latest estimates (revised April 12) assume Western SPF (spruce-pine-fir) lumber prices average US$820 per thousand board feet in 2021 (50 per cent lower than spot), with SYP (southern yellow pine) lumber at US$889 per thousand board feet (36 per cent below spot) and OSB North Central at US$728 per thousand square feet (42 per cent below spot).

While these assumptions may appear overly conservative given recent pricing trends, we note our EBITDA (earnings before interest, taxes, depreciation and amortization) estimate for West Fraser in 2021 is 14 per cent higher than consensus.

The setup is particularly strong this year given lean lumber, OSB and plywood inventories, and an inability of the industry to surge capacity as COVID-related labour disruptions weigh on productivity.

We continue to expect prices to moderate in 2022 as record profitability incentivizes more capacity, with SPF prices forecast to average US$550 per thousand board feet next year and OSB North Central averaging US$410 per thousand square feet.

Hamir Patel and Roshni Luthra are CIBC World Markets analysts covering the materials sector who enjoy a front-row view of Canada’s lumber industry from Vancouver.

This is an edited version of an article that was originally published for subscribers in the June 4, 2021, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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