Lumber could be the new oil

Below is an article from the Financial Post on December 2, 2009. I’d like your opinion: do you think lumber prices will out place oil prices in the next couple of years?

Lumber could be the new oil

Eric Lam,  Financial Post

Presented by Canwest News Service

Shares of several of Canada’s largest lumber exporters have skyrocketed in the past two months as new building codes in China allowing wood in construction have cracked open a previously inaccessible market for Canada’s long-suffering forestry industry.

Since Oct. 1, shares in International Forest Products Ltd. have soared 58.3%, while Canfor Corp. and West Fraser Timber Co. Ltd. shares jumped 31.4% and 28.4%, respectively.

The advances come in the wake of quiet implementation of new wood-frame construction codes in Shanghai in September. Lisa Raitt, Minister of Natural Resources, later attended a launch in the city in early November. “We are confident that the Shanghai Local Code provides a framework that will be easily adaptable to other cities and provinces across China,” she said.

David Watt, a currency strategist with RBC Capital Markets, sees this development as a breakthrough for both the lumber industry and the loonie. “This is an opportunity the Canadian lumber industry has been dreaming about for years,” he said. “This gives us a chance to take advantage of a huge market that has suddenly overcome an aversion to your product.”

And the price of lumber has so far reflected that excitement, with lumber futures on the Chicago Mercantile Exchange for January 2010 rising 21% since October, closing Wednesday at US$231.

Lumber exports are also on the rise, with Pat Bell, B.C. Minister of Forests and Range, estimating that exports will reach a new high of 1.5 billion board feet for 2009, and top four billion in 2011.

Canadian lumber exporters have had a difficult time convincing the Chinese that wood-frame buildings could be as stable as concrete buildings. However, deadly earthquakes in China in the past few years have likely forced the Chinese government to reconsider their stance on using the material.

“With the earthquakes, it was clear some of the buildings made of wood held up a lot better,” Mr. Watt said. As for ties to the Canadian dollar, he suggests lumber could be the “oil of the next decade” in how it lifts the loonie.

“It may seem dramatic, but consider in 1999 a barrel of oil was US$12, so who would’ve thought oil would be the oil of the past decade?” he said. “Will there be an oil-like rise in lumber? Who knows? Why not?”

A Vancouver-based analyst said the news is positive for Canadian lumber, but warned it was too early to know how it would affect exports.

“It’ll definitely help fix the supply-demand balance, so any news out there will help, but in the next year or two it won’t be a huge driver,” he said, noting it will take at least a year to educate construction companies about wood frames.

Lumber could be the new oil.


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