Lower lumber prices and severe forest fires in Western Canada are partially behind Canfor's Q3 decline in both its lumber, the company reports.
The company reported operating income of $201.8 million for the third quarter of 2018, down $80.3 million from reported operating income of $282.1 million for the second quarter of 2018, with the decline reflecting lower operating earnings in both the lumber and pulp and paper segments. Reported results for the third quarter of 2018 included a net duty expense of $42.6 million, at a current effective countervailing duty (CVD) and anti-dumping duty (ADD) rate of 14.94 per cent, compared to $51.7 million reported in the second quarter of 2018. After adjusting for duties, operating income was $244.4 million for the third quarter of 2018, down $89.4 million from similarly adjusted operating income in the second quarter of 2018.
Adjusted lumber segment earnings primarily reflected steep declines in Western Spruce/Pine/Fir (Western SPF) and Southern Yellow Pine (SYP) benchmark lumber prices, and to a lesser extent, the disruptive impacts of severe forest fires in Western Canada, and Hurricane Florence in the US South, which contributed to significant cost pressures and temporary operational downtime as a result of limited log deliveries and evacuation alerts. Pulp and paper segment earnings largely reflected a 20% decrease in pulp shipments that was mostly timing-related, and to a lesser extent, higher market-driven fibre costs.
Notwithstanding the downward pressure on pricing through the third quarter of 2018, lumber demand in the North American market remained relatively stable, with U.S. housing starts averaging 1,218,000 units on a seasonally adjusted basis, down 3 per cent from the previous quarter and up 4 per cent from the third quarter of 2017. Offshore lumber consumption remained solid through the third quarter, with demand particularly strong in Japan, Canfor reports.
While the average benchmark North American Random Lengths Western SPF 2x4 #2&Btr price at US$482 per Mfbm was down US$116 per Mfbm, or 19 per cent, compared to the second quarter of 2018, Western SPF lumber unit sales realizations benefitted from a strong order file to start the quarter, a higher-value sales mix, and improved offshore pricing. The average benchmark North American Random Lengths SYP East 2x4 #2 price was US$488 per Mfbm, down US$101 per Mfbm, or 17 per cent, with this decline offset, in part, by a modest increase in 2x10 pricing. The sharp drop in lumber prices from the historical highs seen in the second quarter of 2018, was primarily attributable to higher inventory levels throughout the supply chain, in part from a continued gradual improvement in transportation networks, Canfor says.
Canfor's total lumber production, at 1.28 billion board feet, was 3 per cent lower than the prior quarter as the benefit of improved productivity was more than offset by increased statutory holidays in the current quarter and the aforementioned disruptions. Total lumber shipments, at 1.29 billion board feet, were down 4 per cent from the previous quarter reflecting reduced production, a drawdown of inventory in the previous quarter following the severe winter weather experienced in the first quarter of 2018, and the impact of flooding and road closures following Hurricane Florence.
Unit manufacturing and product costs in the third quarter of 2018 were moderately higher than the previous quarter reflecting higher market-based stumpage and the significant impacts of Hurricane Florence in the US South and severe forest fires in Western Canada, which contributed to lower harvested volumes and increased competition for purchased wood. Log costs in the U.S. South remained stable through the quarter. Global softwood pulp market conditions remained balanced through the third quarter of 2018, with US-dollar Northern Bleached Softwood Kraft (NBSK) pulp list prices, for the most part, reflecting steady global demand. Average NBSK pulp unit sales realizations were in line with the previous quarter as a weaker Canadian dollar and record high US-dollar NBSK pulp list pricing in North America offset a slight decrease in the China US-dollar NBSK pulp list price. Average Bleached Chemi-Thermo Mechanical Pulp (BCTMP) unit sales realizations showed a modest decrease quarter-over-quarter as a result of lower US-dollar BCTMP prices.
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