RBC expects “mixed” Q3 results for paper & forest products

By Paul Quinn, RBC Analyst
RBC Capital Markets
October 23, 2023
Category: Opinion / EdiTOADial
Region: Canada, United States

RBC analyst Paul Quinn is expecting “mixed” third-quarter financial results from North American paper and forest product companies, seeing “more supportive building materials prices but somewhat lower prices across several other commodities. “Pulp prices seem to have bottomed, led by a resumption of purchasing activity by China, although significant capacity additions and elevated inventory levels are likely to slow the pace of a recovery,” he said. “Paper prices have moved only modestly lower, but operating rates are weak. Supply-demand tension in containerboard is improving somewhat with recently announced closures, and prices have stabilized, but we expect market-related downtime to offset new mill start-ups to continue for the near-term. Timber prices remain weak across North America due to weak lumber and other end use consumption.

“During the Q3 earnings season, we think investors will be focused on the trajectory into 2024, particularly as it relates to wood products demand against a backdrop of elevated interest rates, and demand for graphic paper and paper packaging. While we wait for an inflection point in the economy, interest rates and overall confidence, we note that valuations remain near historic lows.” Heading into earnings season, Mr. Quinn predicts lumber prices are likely to “struggle to gain meaningful momentum” through the remainder of the year, “barring any transportation issues or unforeseen events, driven by both seasonality and higher interest rates weighing on new construction and R&R activity.

“With elevated inventory levels, we expect pulp prices to remain relatively weak through the end of the year, to the benefit of tissue producers (CAS and CLW),” he added. “We think paper packaging names (containerboard and boxboard producers) are also likely to see improving demand as North American destocking concludes, and note that containerboard producers continue to rationalize capacity. For the balance of the year, we favour lumber, tissue and paper packaging companies.” “We expect low pulp pricing and continued weak graphic paper demand to weigh on companies leveraged to these commodities in Q3. While paper consumption enjoyed a renaissance in 2021 and 2022, significant destocking and negative secular demand trends through 2023 are a significant headwind. We also are cautious on OSB, as we anticipate that the significant capacity additions in 2023 will bring OSB prices down to modestly above cash costs in 2024.”

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