The U.S. Broaches Chapter 19 at NAFTA Negotiations: Should You Sell Lumber Stocks?

In spite of positive earnings from Canadian softwood lumber stocks such as West Fraser Timber Co. Ltd. (TSX:WFT), a strong opening bid in the NAFTA negotiations from the U.S. is a concern for investors.

| More on:
logs

As the first week of NAFTA negotiations wrapped up, representatives from the United States dropped a bomb and made a formal demand that Chapter 19 dispute resolutions be scrapped. It came in a week wherein the U.S. delegation appeared to strike a moderate tone, shying away from making formal presentations on rules of origin for auto manufacturing. This demand should raise eyebrows, as it is one of the key stipulations identified by Canada that could prompt the country to walk away if it were removed.

Negotiations are expected to recommence in Mexico City from September 1 to 5. This will give the Canadian delegation almost two weeks to stew over this latest demand. Reports indicate that U.S. leadership wants talks to conclude by the end of the year. The Trump administration is hungry for victories after a recent failure to restructure healthcare, and the Republican Party no doubt has its eyes on the midterm elections in November 2018.

Lumber stocks are on shaky ground

The stock price of West Fraser Timber Co. Ltd. (TSX:WFT) has fallen 3.8% month over month as of the close on August 21. In spite of positive second-quarter earnings released on July 20, the share price has been the victim of downward pressure ahead of the renegotiations as well as general weakness in the Canadian stock market. The company reported record sales and earnings were up 49% from Q2 2016.

Shares of Canfor Corporation (TSX:CFP) dropped 1.1% on August 21. The company released its second-quarter results on July 26 which were also incredibly positive. The stock hit a 52-week high of $21.82 in early August before succumbing to investor concerns. It is now hovering around pre-earnings levels.

Interfor Corp. (TSX:IFP) has seen its stock drop 5.2% over the course of the past week as of August 21. The company announced its second-quarter results on August 3 and saw net earnings increase from Q2 2016 to $24.5 million, or $0.35 per share. The results gave the stock a quick bounce that was short-lived.

The United States is turning to competitors for softwood lumber

Imports of Russian and German softwood lumber to the United States increased 42% and a shocking 900%, respectively; Canadian shipments were down 1%. The United States startled the industry by slapping import taxes averaging 26.75% as punishment for “unfair subsidies” on the part of Canada. Imports from Sweden and Romania also saw tremendous gains. The German advantage is particularly interesting, as the Trump administration has taken aim at Germany for its trade practices and surplus with the U.S.

Whatever one may think of the strategic considerations behind these moves, it is clear that the United States is willing to assert itself early on. Time will tell if axing Chapter 19 is a sticking point for the U.S. delegation or merely a show of strength early in negotiations.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any stocks mentioned.

More on Investing

A cannabis plant grows.
Cannabis Stocks

Canopy Growth Stock Is Rising But I’m Worried About This One Thing

Canopy Growth stock is soaring as the legalization effort makes real progress in both Germany and the United States.

Read more »

young woman celebrating a victory while working with mobile phone in the office
Investing

3 Roaring Stocks to Hold for the Next 20 Years

These top TSX stocks are excellent long-term buys, given their multi-year growth potential and solid underlying businesses.

Read more »

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

grow dividends
Investing

Here’s My Top 3 TSX Stocks to Buy Right Now

Even though the TSX has been rising, there are still some good bargains out there. Here are three top compounding…

Read more »

Target. Stand out from the crowd
Investing

Prediction: This Canadian Growth Stock Could Double by 2030

Alimentation Couche-Tard (TSX:ATD) is a top growth stock that could do well over the next six or so years.

Read more »

Businessman holding AI cloud
Tech Stocks

Could Investing $20,000 in Nvidia Make You a Millionaire?

Nvidia stock has made investors millionaires in the last 10 years. Is it too late to invest to become a…

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

money cash dividends
Stocks for Beginners

Have $500? 3 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now

If you're looking for cheap stocks, these three have a huge future ahead of them, all while costing far less…

Read more »