Canadian lumber producers fear that weak U.S. home sales could delay recovery

MONTREAL — Canadian lumber producers say they are concerned that weak U.S. home sales could further delay a recovery in demand for home building materials.
“AbitibiBowater is concerned by these numbers,” spokesman Pierre Choquette said Wednesday, noting that the latest housing starts dipped 10 per cent to below 600,000 per year.

He said the company, which sells lumber in addition to newsprint, fears that the recent drop in housing starts signals that increasing prices and demand in the second quarter of the year were mainly due to low inventory.
A bleak picture about the U.S. housing market has emerged over the past couple of days.
The Commerce Department said Wednesday that sales of new homes dropped 12.4 per cent last month to the slowest pace on records going back nearly half a century, the latest sign that the economic recovery is fading.
That followed a National Association of Realtors report on Tuesday that sales of previously occupied homes dropped 27 per cent in July, the weakest showing in 15 years.
Together they signal that an anticipated slow recovery in Canadian lumber demand may be delayed further yet.
Montreal-based AbitibiBowater, which hopes to exit creditor protection in October, said it has slowed production of some wood products operations in Quebec and related woodlands, affecting 50 workers.
The expiry of a home tax-credit program was already expected to hamper a rebound. But slowing economic growth, anemic jobs growth, foreclosures and tight credit conditions also remain pressures on the real estate market, said Paul Quinn of RBC Capital Markets.
Industry observers had forecasted that housing starts would increase by 20 per cent this year to 645,000 units, followed by 885,000 in 2011.
“2011 looks like a sightly better repeat of 2010, so we will likely see the same volatility on lumber, plywood and OSB prices, as distribution inventories remain historically low,” he said in an email.
He noted that softwood lumber issues that “continue to bubble below the surface” could have a “material impact” on west coast lumber producers.
One industry observer is looking forward to next month’s U.S. housing reports to determine if the situation was a blip. Lower lumber demand doesn’t necessarily mean large job losses since many companies have already made adjustments.
“I wouldn’t say huge incremental job losses from current levels because since 2006 we’ve been suffering with this but no job creation is more like it,” said the observer who didn’t want to be identified.
Tembec (TSX:TMB) said last month that it expects prices will continue to be volatile as demand will only return in mid to late 2011.
West Fraser Timber Co. (TSX:WFT) recently said it expected that low U.S. housing starts would decrease lumber prices in the second half of the year. The producer noted, however, that housing starts in Canada would likely support “reasonable demand” for plywood.
But the Conference Board of Canada said Wednesday that home building activity is also expected to slow in the second half of the year due to declining affordability.
“Most of the costs associated with home ownership, such as mortgage costs and insurance, are outstripping inflation and income growth. As a result, housing affordability in Canada, which has been deteriorating over the past decade, will continue to decline during the next two years,” said Michael Burt, associate director of Industrial Economic Trends.
Although the performance of the Canadian housing industry is weakening, the market’s fundamentals are stronger this side of the border, said a conference board report.