Canfor reports $331M in operating income in Q3 2021
October 28, 2021 By Canfor
Canfor Corporation has reported its third quarter 2021 results:
- Q3 2021 reported operating income of $331 million driven by solid lumber segment results despite a sharp decline in North American lumber prices from prior quarter all-time highs
- Record quarterly earnings for the company’s European lumber operations
- Shareholder net income of $210 million, or $1.68 per share
- Cumulative cash deposits of $656 million on countervailing and anti-dumping duties at Sept. 30, 2021
The company reported operating income of $331.0 million for the third quarter of 2021 driven by solid earnings in both the lumber and pulp and paper segments. Compared to the second quarter of 2021, current quarter reported operating income was down $710.3 million, reflecting a material decline in lumber segment earnings from an all-time high in the previous quarter, and, to a lesser extent, moderately lower pulp and paper segment earnings.
For the lumber segment, earnings decreased $674.4 million quarter-over-quarter largely as a result of steep declines in North American benchmark lumber prices through most of the current period. This drop in pricing, combined with lower production and shipment volumes and higher unit manufacturing costs, particularly in Western Canada, substantially outweighed the benefit of unprecedented European benchmark lumber prices.
Commenting on the company’s third quarter results, Canfor’s president and chief executive officer, Don Kayne, said, “Despite the decline in North American benchmark lumber prices and the supply chain challenges experienced during the quarter, our employees demonstrated ongoing resilience and we are pleased to see the continued benefit of our global diversification strategy, with our European lumber business results surpassing the previous quarter record and reaching a new all-time high in the current period. While our pulp business saw lower production, largely associated with the previously announced scheduled and unscheduled downtime, it delivered solid financial results in the quarter. The global supply chain constraints are expected to continue in the fourth quarter, but overall lumber markets are anticipated to be stronger.”
North American market fundamentals weakened in the third quarter of 2021, as record-high lumber prices in the first half of the year, combined with global supply chain disruptions, led to significantly reduced consumer spending in the repair and remodeling sector and modestly lower new home construction activity.
Notwithstanding the downward pressure on North American pricing through the third quarter of 2021, U.S. housing starts remained relatively strong largely due to a steady focus on multi-family dwellings. U.S. housing starts averaged 1,566,000 units on a seasonally adjusted basis in the current quarter, broadly in line with the prior quarter. In Canada, housing starts averaged 263,000 on a seasonally adjusted basis in the current period, down six per cent from the second quarter of 2021, primarily reflecting a slight slowdown in new home construction activity in several major cities.
Offshore lumber demand and prices in Asia, most notably Japan, continued to strengthen in the current period, as increased building activity and lean inventory levels in the region more than outweighed the impacts of global container shortages and port congestion. Western Europe and Scandinavian lumber demand remained solid through most of the current quarter, largely reflective of the continued strength in the repair and remodeling and residential construction sectors in that region.
The North American Random Lengths Western Spruce/Pine/Fir (SPF) 2×4 #2&Btr price declined sharply through the first half of the current quarter, reaching a low of US$385 per Mfbm in mid-August. After improving somewhat through September, the Western SPF 2×4 #2&Btr price ended the period at US$533 per Mfbm and averaged US$494 per Mfbm for the current quarter, down US$848 per Mfbm, or 63 per cent, from the previous quarter. The company’s Western SPF lumber unit sales realizations reflected this marked decline in North American benchmark pricing, offset in part by a significant uplift in offshore unit sales realizations, particularly in Japan.
The North American Random Lengths Southern Yellow Pine (SYP) East 2×4 #2 price followed similar trends to Western SPF, reaching a low of US$492 per Mfbm late July before gradually increasing through the balance of the quarter to end the period at US$575 per Mfbm. For the current quarter overall, the SYP East 2×4 #2 price averaged US$533 per Mfbm, down US$630 per Mfbm, or 54 per cent, from the prior quarter, with similar pricing declines seen in wider-width dimensions. As a result, the company’s SYP lumber unit sales realizations principally reflected these substantial declines in SYP benchmark pricing quarter-over-quarter.
In contrast to the company’s Western SPF and SYP lumber unit sales realizations, European lumber unit sales realizations experienced a notable uptick quarter-over-quarter, largely driven by strong European market demand, particularly in the United Kingdom, impacted somewhat by the timing lag in European contract pricing and the decline in the North American U.S. dollar benchmark pricing environment.
Total lumber shipments, at 1.32 billion board feet, were 14 per cent lower than the previous quarter principally due to reduced production in Western Canada, and to a lesser extent, Europe. Shipments in the U.S. South were relatively comparable quarter-over-quarter.
Total lumber production, at 1.28 billion board feet, was 15 per cent below the prior quarter primarily reflecting temporary curtailments in July at the company’s Western Canadian operations stemming from extreme wildfire conditions and the associated significant transportation backlog, combined with the implementation of reduced operating schedules across the company’s operations in British Columbia in August and September as a result of challenging lumber market conditions. Together, these temporary curtailments and capacity reductions lowered Western SPF production by approximately 160 million board feet in the current period. Lower production in the U.S. South was largely a result of low log inventory levels due to wet weather in the region, while reduced production in Europe was attributable to four weeks of regular seasonal production downtime in July and August, mitigated in part by improved productivity across the Company’s European operations.
Lumber unit manufacturing and product costs were significantly higher quarter-over-quarter, primarily reflecting notably higher log costs in Western Canada, and, to a lesser extent, Europe, combined with the incremental impact of lower production volumes on unit manufacturing costs. In B.C., log cost increases in the current quarter were largely a result of higher market-based stumpage costs stemming from record lumber pricing earlier in the year. In Europe, a moderate uplift in log costs mainly reflected market-related increases in the region, correlated to the rise in European lumber prices. Log costs in the U.S. South were broadly in line with the prior quarter.
Looking ahead, notwithstanding the sharp correction in North American benchmark lumber prices in the third quarter and ongoing global logistics constraints, overall lumber market fundamentals are projected to be strong through the fourth quarter of 2021, supported by steady demand in the residential and construction sector. In recent weeks, demand in the repair and remodeling sector, which experienced downward pressure in the third quarter, has significantly increased, and is anticipated to continue to improve over the balance of the year as supply and demand move back into balance following summer curtailments and reduced operating rates across Western Canada.
Offshore lumber demand in Asia, particularly in Japan, is projected to show moderate strength through the balance of 2021, as demand and supply trends experienced in the third quarter in that region are anticipated to continue. European lumber markets are forecast to come under pressure in the fourth quarter, with an anticipated reduction in consumption across all sectors following exceptionally strong demand in the preceding three quarters.
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