The Big Canadian Lumber Dump... Here's How to Profit
By Tom Dyson
January 30, 2008
Last week, I drove into central Florida to talk with Don Magruder... general manager of Ro-Mac Lumber & Supply.
I outlined Don's view of the homebuilding industry in my last column. Today, I'm going to give you Don's thoughts on the building material industry... and end with an excellent opportunity to profit from the situation starting right now.
The building materials industry supplies lumber, cement, copper, steel, and asphalt to the construction industry. According to Don, building material prices are rising.
Don says rebar prices went up 20% in 2007. He says steel stud prices rose 10%, roofing shingles went up 10%-13%, and drywall rose 10%. I read elsewhere that asphalt was up 24% and cement rose 7% last year.
This makes sense. The costs of making and transporting materials have risen fast. Oil was up 70% in 2007. Steel was up 11%. Copper was up 15%. And we see these price increases reflected in the consumer and producer price indexes. In 2007, the CPI rose 4.1% and the PPI for finished goods jumped 6.3%.
But while the other building materials have inflated, wood products have deflated. Here's how benchmark lumber products performed in 2007:
Softwood Lumber: -15%
Oriented Stand Board (OSB): -25%
Plywood: -14%
Take oriented stand board as an example. OSB is a panel board like plywood. Only it's cheaper and stronger than plywood. Builders use OSB in floors, stairways, walls, and roofing.
To make OSB, first you have to shave the bark off the tree. Then you chip the tree into small strands of wood, organize them for maximum strength, cover them in glue, and then squash this mixture in a hot press until it's as thick as a slice of bread. It sounds easy... But on an industrial scale, it's a complicated, expensive process. That's why they call it "engineered" lumber.
Right now, you can buy a thousand square feet of OSB for $130, not including transport costs. That's enough OSB to cover three bowling lanes side by side. Per sheet, OSB costs $4.16.
Do you really think it's possible to make a profit selling this high-tech, cutting-edge wood product at just $4.16 a sheet?
"No chance," says Don. "The mills are having their asses handed to them."
Don says there's a reason wood prices collapsed while all other building materials went up in price: the Canadians.
Right now, the Canadians are liquidating their inventories of lumber. They're selling at any price because they need the cash... no matter what.
You see, even though Canada has the best-quality wood in the world... and nature has blessed it with a huge supply... the Canadian dollar is at parity with the American dollar. Canadians receive U.S. dollars for their wood products, but pay costs in Canadian dollars. And that's killing the Canadian sawmill industry.
The Canadians simply cannot compete with the Americans. As long as the Canadian dollar stays at these levels, and the 15% softwood lumber tariff on Canadian exports remains, the Canadian lumber industry will go out of business.
I've seen this collapse for myself. I went to Canada and met sawmill operators who couldn't even sell wood in their own neighborhoods. Why? The locals were crossing the border into the U.S. and buying their wood 25% cheaper.
So right now, Don tells me the Canadians are doing anything they can to stay afloat and pay their debts. And that means liquidating their inventories. This is the wood they have on their lots. They're selling it way below the cost of production... because, without cash, they'll go bankrupt.
Don calls it a game of chicken. I call it a race to the bottom.
The big Canadian lumber dump is compressing prices to absurd levels. This situation is not sustainable. The big dump has to stop soon. And when it does, says Don, lumber prices will rise and line up with other building commodities...
You can buy lumber in the futures market. This is the purest investment... and my favorite way. But futures aren't for everyone.
Several lumber manufacturers trade on the stock exchange. Remember, many other factors are involved when you make equity investments (like debts, costs, and bankruptcies) that you don't have with pure commodity investments. But their stocks are at multiyear lows right now. And when lumber prices rise, these producers generate bigger profits. You might consider buying one of them.
The Canadians are dumping their lumber in a desperate attempt to stave off their creditors. Their actions are causing lumber prices to fall while prices of every other type of building material rise. Now lumber sells for less than the cost of production. This situation cannot last. The time to buy lumber is now.
Good investing,
Tom
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