Investors appeared to ignore last week’s announcement that the U.S. Department of Commerce will reduce softwood lumber tariffs on Canadian shipments into the United States. But the news adds a potential sweetener to the investment case for Canadian forestry stocks.
On Jan. 31, the Commerce Department announced in its preliminary review that its countervailing duties and anti-dumping rates on Canadian imported lumber will decline in August to 11.6 per cent, on average across the forestry sector, from the current rate of 17.9 per cent.
These duties have been weighing on the sector since the softwood lumber agreement between Canada and the United States expired in 2015.
In its wake, the U.S. Lumber Coalition argued that Canadian lumber mills receive government subsidies in the form of below-market harvesting fees on public land. Duties on Canadian lumber are supposed to address these concerns, much to the chagrin of Canadian forestry companies.
But their share prices so far have appeared to ignore the shift toward the lower levies announced last week.
Canfor Corp. CFP-T, which will see levies on its exports fall to 6.75 per cent from 19.54 per cent previously, has seen its share price slip 2 per cent over the past six trading days since the Commerce Department’s announcement.
West Fraser Timber Co. Ltd.’s WFG-T share price has risen 2.4 per cent, even though the producer will actually be hit with slightly higher duties of 13.09 per cent, up from 11.14 per cent currently.
In some ways, there are far bigger issues facing the Canadian forestry sector, which appear to underscore a bullish case for investors.
For one, the U.S. housing market is booming, underpinning lumber demand. Home prices are soaring, sales activity is at its highest level in 15 years and builders are busy. In 2021, construction began on 1.6 million homes, which is the most since 2006.
“We have a real deficit of houses in the U.S. and Canada. Everybody is building like crazy,” John Duncanson, timber analyst at Corton Capital’s Global Timber Fund, said in an interview.
He added that U.S. President Joe Biden’s ambitious infrastructure bill, which includes renewed focus on bridge repair, will add even more demand for Canadian lumber.
This strong demand is being reflected in lumber prices. The price of Western spruce, pine, fir (or SPF), one of the most cited types of lumber, is US$1,180 per thousand board feet, up 25 per cent from this time last year – and the spring building season hasn’t even begun.
Canadian forestry companies, many with mills in the United States that skirt duties, are doing well with this backdrop of robust demand and lumber prices.
Three quarters of the way into 2021, Canfor reported revenue of $6.1-billion, up 59 per cent from last year. Net income over this nine-month period, ended Sept. 30, ballooned 554 per cent, to $1.36-billion. The company will report its fourth quarter and year-end financial results on March 1.
No wonder levies might look like an afterthought to some investors.
Hamir Patel, an analyst at CIBC World Markets, said in a research note last week that the lowered rates are “relatively insignificant in the current commodity backdrop.”
Still, investors may want to look at softwood lumber duties as a potential gift down the road. Collected duties held on deposit by the U.S. government are approaching US$4.5-billion, according to Mr. Duncanson.
A softwood lumber agreement – not such a bad bet over the longer term, given strong demand for lumber amid tight supply – could send much of that money back to Canadian forestry companies.
Mr. Duncanson expects that lowered levies alone should save Canadian forestry companies held in the Corton Global Timber Fund an estimated $220-million a year in combined cash duty deposits, potentially buttressing their dividend payouts.
“It’s a very big positive, and it’s a hidden asset,” Mr. Duncanson said.
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