EUR 850.00 For Business Accounts Only

Morningstar | The Incoming Wave of Millennial Household Formation Will Lift Lumber Prices From Current Levels

Canfor is one of the largest softwood lumber producers in the world, with 6 billion board feet of production capacity in western Canada (73% of capacity) and the southeastern United States (27%). Homebuilding and remodeling are the main uses of softwood lumber in North America, although Canfor does export significant volume to China, making up roughly one fourth of sales in recent years. As price-takers, Canfor and peers see dramatic profit variations depending on the health of the U.S. housing market. After a lean decade for residential construction, we expect favorable demographics, a tighter labor market, and looser mortgage availability to catalyze improved homebuilding activity over the coming decade. We estimate that U.S. housing starts will peak at 1.6 million in 2022 as pent-up demand is unleashed before fading to a demographically sustainable 1.5 million in 2027.We expect profits to weaken Canfor's lumber business versus an exceptionally strong 2018. This segment accounts for about 85% of revenue on an adjusted basis. We see segment EBITDA dipping in the coming years before gradually rebounding amid increased homebuilding activity. On a midcycle basis, we forecast margins fading to roughly 10% as housing activity normalizes and economic profits attract new supply. Despite volatile market conditions, Canfor has been able to reinvest in its business with an eye on a housing recovery. Management recently completed a major capital plan aimed at bolstering its cost position. Meanwhile, Canfor purchased lumber capacity in the Southeastern U.S., amplifying its exposure to a housing upturn and diminishing its reliance on western Canadian mills, which will struggle with timber availability as a result of the mountain pine beetle's devastation of British Columbia forests. In addition, this reduces Canfor's exposure to U.S. tariffs.Canfor's pulp and paper business, which accounts for 15% of revenue after adjusting for Canfor Pulp’s 49% stake, mostly sells pulp to tissue and specialty paper end markets. We assume EBITDA margins will fade from prevailing high teens levels to the low to mid-teens over the long run.