North American lumber producers are expected to post another quarter of record profits this week, but most attention will be on the outlook, with prices for wood products stumbling and do-it-yourself renovations slowing.
Producers are building and expanding sawmills in the southern U.S., where costs are low and timber is plentiful, while boosting output on expectations that the surge in home building will continue. Some analysts warn that an oversupply may be building up, even with bottlenecks and supply constraints in British Columbia, Canada's biggest lumber exporter to the U.S.
"We need to see some more supply cuts to re-balance inventories and turn prices around," said Mark Wilde, a timber and wood products analyst at BMO Capital Markets.
Lumber companies -- including West Fraser Timber Co. Ltd., Canfor Corp. and Weyerhaeuser Co. -- have been swimming in cash during the past year because of an unexpected boom in home building and renovations that caused wood prices to quadruple in 12 months and hit record highs in May. That will result in "the mother of all quarterly returns with record profitability" and revenue that exceeds first-quarter results, said Greg Kuta of Westline Capital Strategies Inc.
Lumber prices have since cooled along with a decline in renovations, prompting analysts to anticipate lower quarterly earnings ahead for the producers. The effect of lower lumber prices and reduced renovations won't be felt until the third quarter, said Kuta, whose Ohio-based firm specializes in lumber-trading strategies.
West Fraser, the world's biggest lumber producer, kicked off the second-quarter earnings season for the industry Wednesday, reporting earnings that beat analyst estimates. Montreal-based Resolute Forest Products Inc. on Thursday also posted better-than-expected net profit and sales.
"With benchmark prices reaching record highs in May and our best-ever quarterly shipments, we used the exceptional cash generation from our wood products segment to make lasting changes to our business," Resolute's Chief Executive Officer Remi G. Lalonde said in a statement.
Seattle-based Weyerhaeuser will report today.
Lumber futures rallied over the past week after Vancouver-based Canfor said on July 20 it would curtail some production capacity at its Canadian sawmills during the third quarter because of "significant supply chain challenges" and transportation backlog in western Canada because of wildfire conditions.
West Fraser's production has also been hurt by fires in British Columbia since the second half of June.