B.C. Wildfires Create Short-Term Buying Opportunity for Canfor Corporation

The wildfires plaguing many parts of B.C. of late have been devastating for those living in its rural communities. Over 14,000 locals have been given evacuation orders amid widespread concerns that wildfires in B.C.’s interior will continue to grow; winds picked up over the weekend, further complicating efforts to rein in the more than 120 wildfires currently burning in B.C.

These wildfires have impacted thousands of hectares of land, which has subsequently had an impact on lumber supply and on therefore lumber prices. Lumber prices increased to approximately US$400 per thousand board feet from US$379 on July 7.

Estimates are that lumber prices could see additional increases based on the total acreage lost to wildfires over the coming weeks — something that has helped boost the stock prices of forestry companies across B.C. Industry experts expect additional lumber price increases between 6% and 8% in the coming weeks, which are partially attributable to reduced supply linked to these fires.

B.C.-based companies such as Canfor Corporation  (TSX:CFP) have risen dramatically since July 7 on the strength of improving lumber prices. Canfor’s share price increased more than 7% over the past week alone. These price increases are a welcome surprise for investors, as widespread concerns about the strengthening Canadian dollar and U.S.-imposed import tariffs and duties on Canadian softwood lumber have resulted in many analysts (including myself) recommending investor caution for B.C. softwood lumber companies such as Canfor.

Several B.C. lumber mills have been temporarily closed as of last week as a precaution due to the wildfires, and much of the speculation that has led to rising lumber prices has been linked to the probability that additional mills will be shut down and for longer periods of time. The length of time that mills remain temporarily closed and the number of mills that ultimately decide to halt production will be the key catalysts investors will be looking at over the coming weeks. That said, many analysts point to additional capacity in other parts of North America as a headwind for B.C.-based producers, as much of the slack related to B.C.-based production is likely to get picked up elsewhere.

Bottom line

While Canfor remains highly cyclical and dependent on U.S. imports and exchange rates for long-term profitability, the recent increase in lumber prices has provided investors with a short-term boost. Over the long term, however, I remain cautious of Canfor’s sensitivity to changes in the Canada–U.S. trade relationship and believe significant downside remains should a widespread global slowdown manifest itself again. Long-term investors considering buying Canfor stock should reference the company’s stock price chart during the 2007/2008 recession as an indication of how much potential cyclical downside remains with Canfor.

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Fool contributor Chris MacDonald has no position in any stocks mentioned.

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