By Rithika Krishna
(Reuters) - North American timber producers are expected to see a dip in current-quarter profit after lumber demand for do-it-yourself home projects decreased following the easing of most restrictions that kept people in their houses.
Lofty lumber prices, the sustained needs of home builders and industrious homeowners during the pandemic pushed their second-quarter profit to record levels. But the DIY market, which accounts for 20% of lumber sales, is leveling.
Canada's West Fraser Timber Co (NYSE:WFG) Ltd, Canfor (TSX:CFP) Corp and Interfor Corp are projected to report combined earnings of about $803 million in the third quarter, according to Refinitiv estimates, about a third of what they posted in the second quarter.
However, lumber supply is expected to tick up as saw mill owners take advantage of recent bumper profits to build more mills and add workers, which will help ease a protracted labor shortage.
Graphic: Lumber price rally winners to come back to earth, https://graphics.reuters.com/LUMBER-RESULTS/jnpwegmbdpw/chart.png
"Revival in supply and weak demand from renovations and the repair sector will put a lid on prices," said Samuel Burman, commodities economist at Capital Economics.
Burman expects lumber prices to hover around $500 to $600 per thousand board feet for the rest of this year, with supply set to rise around 6% in 2021 compared to pre-pandemic levels.
Lumber futures touched a record high of $1,711 per thousand board feet in May. However, futures contract for lumber with delivery in November traded at just $483 per thousand board feet.
Graphic: Timber stocks lose steam as prices pull back, https://fingfx.thomsonreuters.com/gfx/mkt/gkplgggdqvb/Pasted%20image%201629138169306.png
In July, U.S.-based Weyerhaeuser (NYSE:WY) Co said it expects third-quarter earnings to be "significantly" lower than the second. Canfor, which breezed past market expectations in the second quarter, hinted at future demand challenges in late July.
"The second quarter was probably the greatest quarter in the history for the lumber producers ... they never made money like they did in the second quarter and they probably won't make money like that again in the near future," said Mark Wilde, analyst with BMO Capital Markets.
Graphic: Top lumber producers' revenues set to fall in Q3, https://graphics.reuters.com/LUMBER-OUTLOOK/klpykkgzepg/chart.png
The windfall from high lumber prices, however, encouraged Canfor and smaller rivals like privately held Tolko and Roseburg Forest Products to open new saw mills.
"The new supply will weigh on pricing," said George Staphos at Bank of America (NYSE:BAC) (BofA) research, adding that some new equipment and capacity installations could go into 2022 and beyond.