A Canadian on Wall Street

It’s been a long time since Canadian forestry companies have seen their day in the sun, unlike some of their American counterparts, like the giant Weyerhaeuser. After the disastrous softwood trade wars that have ensured that companies like Canfor, Abitibi and West Fraser Timber missed out on the U.S. housing boom and its hunger for construction material, the decline of the newspaper and its requirement for newprint in the age of the web and other electronic media and a general move to recycling of pulp and paper, it’s hard to imagine Canadian forestry rising from the ashes.

But there are a lot of people betting on it, predominantly value investors and contrarians who see in Canadian forestry one of the few areas of distressed value in a time where most stocks are at all-time highs. Personally, after a premature foray into Domtar, the Montreal-based company that just recently sold off its interest in Norampac to Cascades, where the stock declined from around $10 to a low of $4.70 only to return to the double digit mark recently, it’s unclear whether or not there’s a significant reason for turnaround. What impetus will be the push to increase pulp or paper prices, neither of which has seen significant upward movement for ages? These companies can pay off their debt, close mills, decrease operating costs like by increasing energy efficiency, but in the end a company has to be in an industry that is thriving. In the second link above, Benj Gallander and Ben Stadelmann of the Contra the Heard newsletter compare forestry to the airline industry, the latter torpedoed by September 11th and the consequent drop in travel, but that analogy seems suspect, given that the airline industry was pushed down by a singular event and not a sea change. There is no clear alternative to flight, not for most travel, whereas forestry is being killed by electronic media, PDAs and cellphones, the continuing development of e-paper and large-scale initiatives that have moved many offices towards less paper, if not paperless. Construction uses less and less wood and more synthetics, and furniture is produced from recycled wood fibre or from wood taken in Asian forestry plantations which work to keep the price of wood low. (For an interesting look into this sector, see Sino-Forest, a Canadian company that manages large plantations throughout China; I’m not super keen on them due to the massive amounts of debt they carry, though.) It’ll take an interesting shift or a monster new application for forestry to make a significant turnaround, I think.