Rising interest rates are certainly having a negative effect on the North American housing market. After a number of years of very strong home price appreciation, affordability was an issue even before rates materially moved higher. We believe that rates will continue to rise over most of 2023 as the Fed tries to corral inflation, but anticipate a cut or two by the end of the year. Unfortunately, that will be too late to save the 2023 home building season, but it may set up 2024 for a rebound in profitability. We are hoping that a difficult 2023 will lead to a number of permanent capacity closures, similar to what we experienced in 2019, with most of the curtailments occurring in BC to balance demand with the declining timber supply. …After relatively strong years for pulp & containerboard pricing, new capacity could disrupt supply-demand balances over the coming year. Over the last quarter, linerboard, medium and pulp prices have peaked and are starting to come under some pressure. We expect this to last through Q123 for containerboard and all through 2023 for market pulp. We think the paperboard market will also loosen at the margin as new capacity comes online.
In Canada, our favorite names for the year ahead are Canfor, Cascades, Doman Building Materials, and Interfor. In the United States, our favorite names are Louisiana-Pacific, PotlatchDeltic, Sylvamo, and Weyerhaeuser. [Recent capacity announcements include:]
Canfor Pulp to close pulp line at Prince George mill. On January 11, the company announced plans to permanently close the pulp line at its Prince George Pulp and Paper Mill. Kevin Edgson, President and CEO, noted that several sawmills have been permanently closed in the Prince George region due to reductions in the allowable annual cut and challenges accessing cost-competitive fibre. As a result, the company carried out an “extensive analysis of its operating footprint and long-term supply of economic residual fibre” and decided to shut down the line as an effort to right-size its operating platform. The company plans to close the line by the end of Q123, resulting in a reduction of 280k tonnes/yr of market kraft pulp. The specialty paper facility at the site will continue to operate.
Interfor announces temporary production curtailments in Q123. On January 11, the company announced plans to reduce lumber production by “at least” 100 mmfbm (or 8% of its quarterly capacity) in Q123. The company cited market uncertainty and the impact to lumber demand. The reduction is expected by management to be mostly concentrated outside of the company’s US South operating region. Interfor noted it expects to resume its normal operating schedule in April 2023, however, it will continue to monitor market conditions and adjust production plans accordingly.
West Fraser announces indefinite curtailment of its Perry sawmill. On January 10, the company announced plans to indefinitely curtail its Perry, Florida sawmill, citing “high fiber costs and softening lumber markets”. According to West Fraser, the curtailment will begin later this month and will reduce its US lumber production by 100 mmfbm. The company anticipates taking an impairment charge in its Q422 results associated with the indefinite curtailment.
Vaagen Bros. curtails production. According to RISI, Vaagen Bros. Lumber is reducing its planned production for 2023 by 100 mmfbm, or ~35%. The company gave notice that it would close its sawmill operations at Midway indefinitely upon running out its winter log deck, and that its second shift at the Usk facility would also cease operations immediately.
Skeena Sawmills curtails log scales at Terrace mill. According to its press release, Skeena began curtailing log deliveries to its Terrace sawmill for a three-week period on January 6, citing eroding operating margins, high operating costs, and limited fibre availability. Sawmill and chipping operations will continue as it draws down the inventory on site for the …