West Fraser remains world's top softwood lumber producer, Canfor narrows gap

MONTREAL - West Fraser remained the world's largest softwood lumber producer for a sixth consecutive year in 2013, but runner-up Canfor narrowed the gap as most of the top producers in the "Billion Board Foot Club" increased output to supply the recovering U.S. housing market and meet strong demand from China, according to an industry report.

Vancouver-based West Fraser's production from 26 mills in B.C., Alberta and the U.S. south exceeded five billion board feet for the first time, reaching 5.15 billion net board feet or 8.3 million cubic metres. It was followed by Canfor (TSX:CFP) at 4.75 billion board feet. Weyerhaeuser's (NYSE:WY) softwood lumber operations in the U.S. and Canada were in third at four billion board feet.

The International Wood Markets survey said the world's top 12 producers remained unchanged and included five Canadian and four U.S. producers, one European company, one South American firm and one company headquartered in Russia.

"With U.S. housing starts up for the fourth consecutive year, most North American companies increased output, although in different ways: some restarted curtailed mills or added shifts, while other benefited from mill capital expenditure programs or outright acquisitions," stated Russell Taylor, Wood Markets president.

He said all but two companies posted production gains last year. The average increase was seven per cent, with two growing by more than 25 per cent.

The total output of the 12 companies was 28.95 billion board feet, up from 26.96 billion board feet. Overall global softwood production grew by only two per cent.

Consequently, the market share of the top producers was 17 per cent in 2013, up from 16 per cent in 2012 and 15 per cent in 2011.

The biggest gainers were Georgia-Pacific, which added 430 million board feet, Canfor (411 million), Interfor (365 million) and Weyerhaeuser (250 million).

With three mill acquisitions in 2014, West Fraser's (TSX:WFT) 30 mills have more than six billion board feet of capacity.

Four of Canfor's 19 sawmills are in the southern U.S., while 13 are in B.C. and one in Alberta. The company sold its Quebec mill and closed its Quesnel, B.C., mill earlier this year. It continues to expand sales in China, with accounted for 24 per cent of sales in 2013, up from two per cent in 2007.

Paul Quinn of RBC Capital Markets expects that West Fraser and Canfor will take advantage of a "super cycle" to pursue acquisitions to drive growth in the next three years.

"As the housing recovery progresses, we believe that many family owned, single-mill operators (30 per cent of the 815 sawmills in North America), which have out come out of the worst cycle in history, will be looking to sell out in the boom," he wrote in a report.

The top 20 Canadian producers expanded their output by 4.9 per cent to 18.91 billion board feet in 2013. Twelve are based in Western Canada, with production accounting for 76 per cent of the Canadian output.

Canfor had the largest Canadian production, with its 14 mills increasing output by nine per cent last year to 4.2 billion board feet. West Fraser's Canadian output from 12 mills grew three per cent to 3.57 billion, followed by Tolko and Resolute Forest Products (TSX:RFP). Resolute, the fourth-largest producer in Canada, slipped two spots to No. 10 in the world.

Tembec (TSX:TMB) was eighth largest with output decreasing 11 per cent to 743 million board feet.

Chief executive James Lopez said the Montreal-based company will consider spending to upgrade its sawmills once it completes a large investment to expand its Temiscaming pulp production facility, which includes upgrading a boiler and selling power to Hydro-Quebec.

"We have some very high payback projects," he told analysts Tuesday in discussing its second-quarter results. "Frankly, it's stuff that other companies that invest heavily in sawmills have already done but can make a pretty drastic shift in terms of our yields, grade recovery and productivity."

Like many North American producers, Tembec endured extremely cold weather in the winter which increased costs for its sawmills. The pressure came as lumber prices have fallen nine per cent so far this year

Lopez said the winter delayed the start of the home construction season, prompting some concern that it may reduce the forecast 1.1 million U.S. housing starts this year.

He added that the biggest concern among Quebec producers is the province's new forestry regime, which they argue is unfair and distorts the market and price of lumber.

"We are hopeful that the new government in Quebec is going to step up and take a fresh look at this and get an understanding of where the deficiencies are in the system and make the changes necessary."

The changes remove a large part of a company's timber supply from its allocations and sells them through public auctions.

Follow @RossMarowits on Twitter.

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