West Fraser reported in October that its third-quarter sales slumped nearly 15 per cent from the same period last year.David Ryder
Canada’s softwood lumber sector has taken a turn for the worse over the past month, as the initial hit from U.S. tariffs and soft demand for building products has evolved into weak financial results and – wow! – more tariffs.
Now, what looked like bargain stocks suffering a brief dip appear far more fragile. Should investors ignore their fears?
The downturn is something to behold.
The share price of West Fraser Timber Co. Ltd. WFG-T – a reasonable proxy for the sector, given its influence and heft – has fallen about 13 per cent over the past month.
The stock is down 32 per cent since the start of the year and approaching a five-year low.
It is not hard to see why the sector is floundering.
U.S. President Donald Trump has raised duties on Canadian softwood imports to more than 45 per cent for most producers, up from just 14 per cent before he began his second term in the White House. These duties include the 10-per-cent increase that began last month.
Canadian softwood producers brace for impact from new U.S. tariffs
Demand for lumber isn’t great either. High mortgage rates and affordability issues over the past couple of years have crimped U.S. homebuilding activity and left homebuilder confidence in the dumps.
Even sales of lumber used in repairs and remodelling are subdued.
Although prices have found some stability this year, according to Madison’s Lumber Reporter, Canadian companies are now removing some of their less efficient production capacity – a process known as curtailment – to preserve cash.
U.S. trade barriers “increase Canadian producers’ costs by an estimated 25-30 per cent, significantly eroding price competitiveness and pushing many sawmills into negative margins,” said Hakan Ekstrom of Global Wood Trends and Glen O’Kelly of O’Kelly Acumen in a report this week.
Despite efforts among Canadian producers to diversify their exports beyond the United States – which accounts for about 87 per cent of exports – Mr. Ekstrom and Mr. O’Kelly expect the Canadian lumber sector will continue to contract through 2030.
Hamir Patel, an analyst at CIBC Capital Markets, estimates that most lumber mills in British Columbia are operating below break-even prices for lumber.
The tough operating environment is showing up in financial results.
In October, West Fraser reported that its third-quarter sales slumped nearly 15 per cent from the same period last year. It reported a loss of US$144-million in terms of EBITDA, or earnings before interest, taxes, depreciation and amortization.
Reasonable investors might be in no rush to consider buying beaten-up softwood lumber producers, given the losses, the cloudy outlook and the determination of the U.S. administration to throttle them.
Yet this notoriously topsy-turvy sector may beckon others with a history of emerging from deep downturns.
Consider that West Fraser reported a loss of US$150-million in 2019 but swung to a profit of more than US$4.1-billion just two years later.
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Most analysts expect West Fraser can rebound from its current problems.
That’s because of the company’s large size, healthy balance sheet, a diversified product mix that includes engineered wood panels and enough cash to weather the current storm. Also, it faces lower effective duties than some competitors.
The question is, when will this rebound begin?
The bullish case rests partly on a low valuation, which is mired at 25-year lows, based on West Fraser’s current price-to-book value of 0.7. That is about half the ratio’s 10-year average of 1.5, according to S&P Global Market Intelligence.
As well, recent cuts to production should drive lumber prices higher when demand picks up – likely as declining mortgage rates boost housing affordability and spur new home construction.
Seasonal repair work, which should return with warmer weather, could add a nice tailwind.
A reduction in U.S. tariffs would help a lot, of course. That’s a big ask of Mr. Trump, but not an irrational one: The National Association of Home Builders, the U.S. trade group, has pushed back against tariffs as a key factor in undermining housing affordability.
For now, West Fraser is a risky bet.
Daryl Swetlishoff, an analyst at Raymond James, recommends staying on the sidelines until 2026 forecasts start to incorporate the company’s particularly challenging environment.
But if you’re equally worried about missing out on a deeply discounted stock, you have company: Though analysts have slashed their target prices – or their estimates of where West Fraser’s share price will be within 12 months – most recommend buying the stock, according to Bloomberg.
Yeah, the lumber sector is in crisis mode. But it’s cheap.