West Fraser Timber Co Ltd WFG

TD Notes

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Trees Weekly

Lumber Capacity Reduction Catalyst for Equities
Canfor Initiatives in B.C. Expected to Lead the Way for Others

• Wood-weighted equities surged last week as capacity rationalization initiatives brought investors off the sidelines. The average share-price gain for our coverage universe last week was 8.2%, led by lumber-weighted equities (+15.8%). Sector improvement outpaced broader markets; the S&P/TSX Composite climbed 1.0%, while the S&P 500 gained 2.4%. On average, share prices for our coverage universe have improved 23.5% from recent Q4/22 lows (an easy reference point; the average negative variance from Q1/22 highs is 27.5%).

• Supply management initiatives have led softwood lumber prices off the recent floor. The Western SPF 2x4 (#2 & better) cash price ended last Thursday at US$415/Mfbm — up 15% w/w and 24% higher than the trough in early January. The nearest Western SPF futures contract price has climbed 37% since January 6 to US$493/Mfbm. The Southern Yellow Pine 2x4 (#2 & better) cash price increased 6% w/w (less direct exposure to B.C. supply reductions).

• Canfor's permanent and indefinite sawmill rationalization initiatives in B.C. are expected to lead this round of lumber supply management. Last week, Canfor announced plans to permanently close the Chetwynd sawmill (annual capacity of 250 million board feet) and an adjacent wood pellet plant. The Houston sawmill (effective annual capacity of ~500 million board feet) will close indefinitely. Both initiatives will take effect by early Q2/23. Canfor is developing plans to construct a new wood processing facility at the Houston site that we assume will produce high-grade lumber with a smaller capacity footprint. The capacity reduction represents 27% of Canfor's B.C. lumber capacity footprint, 13% of the company's North American capacity, and >1% of North American overall capacity.

• OSB prices inched higher last week. The benchmark North Central OSB price ended last week at US$235/Msf — up 2% w/w and the first weekly increase since August. Market reports mentioned mixed signals on demand indicators and less aggressive inventory restocking than was evident in lumber markets.