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Canfor reports $50M operating loss in Q2 2019

For the second quarter of 2019, Canfor reported an operating loss of $49.7 million, an improvement of $20.2 million from the operating loss of $69.9 million reported for the first quarter of 2019.

The improvement reflected higher lumber segment earnings that included a full quarter of the Vida Group of Sweden’s results following completion of Canfor’s acquisition in the first quarter of 2019.

Pulp and paper segment earnings were similar to the previous quarter after taking account of inventory write-downs. Reported results for the second quarter of 2019 included a net duty expense of $45.2 million, at a combined countervailing duty (CVD) and anti-dumping duty (ADD) accrual rate of 26.24 per cent, compared to $36.3 million reported in the first quarter of 2019 at the same cumulative combined rate.

Reported results in the second quarter of 2019 also included a $25.0 million recovery in the lumber and log inventory write-down provision, partly offset by a $13.4 million finished pulp and raw material inventory write-down.

Reflecting the decision to permanently close the company’s Vavenby sawmill in British Columbia, reported results in the second quarter included estimated restructuring costs of $11.5 million.

After adjusting for the aforementioned items, the company’s operating loss was $4.6 million for the second quarter of 2019, down $9.6 million from similarly adjusted operating income in the first quarter of 2019, with weaker lumber segment results more than offsetting improved results for the pulp and paper segment.

Canfor successfully completed the first phase purchase of 49 per cent of Elliott at the end of May, with the remaining 51 per cent being acquired in one year. The acquisition adds 210 million board feet of high-value SYP lumber production capacity.

Results in the pulp and paper segment reflected a solid operating performance at Canfor Pulp Product Inc.’s pulp and paper mills, which more than offset the effects of pricing declines due to continued elevated global market pulp inventory levels and weaker demand, particularly in China and Europe.

North American home construction and repair and remodeling activity was muted in the second quarter of 2019. U.S. housing starts, on a seasonally adjusted basis, averaged 1,263,000 units, up four per cent from the previous quarter and slightly higher than the second quarter of 2018; multi-family starts were up 19 per cent from the previous quarter, while single-family starts, which consume a higher proportion of lumber, were down two per cent compared to the same period. The slower than anticipated recovery in U.S. housing starts in part reflected record year-to-date precipitation levels and severe flooding across the U.S. South early in the quarter, which delayed the start of the typically busy spring construction season. Demand was also tempered while the market continued to absorb surplus inventory.

In Canada, housing starts averaged 224,000 units on a seasonally adjusted basis, up 20 per cent from the previous quarter as multifamily starts surged in several major cities.

Offshore lumber demand was down, particularly in China and Japan, due primarily to a slow unwind of high inventory levels in the supply chain. European lumber demand remained solid through most of the current quarter, with weakness in other global markets having a marginal impact on the region.

Energy revenues increased in the current quarter as seasonally lower energy prices were more than offset by increased power generation, driven by improved productivity and a full quarter with Northwood’s new Turbo Generator Condensing turbine in operation.

“This was another difficult quarter for our Western SPF business with the ongoing challenging market conditions, combined with high log costs, which have resulted in the announcement to close of our Vavenby mill and curtail other B.C. operations. We deeply regret the impact these decisions are having on our employees and local communities,” said Don Kayne, Canfor’s president and CEO. “Our SYP business delivered solid results in the second quarter and we expect that to continue through the balance of the year. Our European business continued to deliver strong financial results. Our pulp business also delivered solid results in the second quarter but in the latter part of the quarter, we began to see significant erosion of NBSK pulp and BCTMP prices, which in combination with the reduced fibre supply in B.C. due to the industry-wide sawmill curtailments, resulted in the decision to curtail operations in the third quarter. We expect to see a modest increase in pulp prices towards the end of 2019 and into 2020 as the global inventory levels come back into balance.”

Future outlook

Looking ahead to the second half of 2019, demand in the U.S. housing sector is anticipated to remain steady, reflecting a gradual pick-up in construction activity into the fall, combined with solid demand in the repair and remodeling sector. Market-based stumpage in B.C. increased materially on July 1, 2019. Given the high cost of fibre and ongoing weak lumber prices, additional curtailments and mill closures in this region are expected. As a result, lumber prices are forecast to gradually improve, as supply becomes more in balance with demand. Lumber prices in Asia are also expected to improve as inventory levels throughout the supply chain stabilize. Through the balance of 2019, European SPF lumber prices are anticipated to experience some pricing pressure driven principally by weakness experienced in other regions in the second quarter, mitigated in part by a moderate decline in log costs. The company’s European lumber business will take its traditional seasonal production downtime in the third quarter of 2019, reducing European SPF lumber production by approximately 70 million board feet.

Global softwood pulp markets are projected to remain challenging through the third quarter of 2019 given the current oversupply in global pulp markets and typically seasonally slower demand in the summer months. Reflecting the difficult market conditions, in combination with fibre supply constraints and higher fibre costs resulting from recent sawmill curtailments, CPPI is taking phased summer curtailments at its Intercontinental and Northwood NBSK pulp mills in Prince George, BC, as well as at its BCTMP mill in Taylor, BC. In addition, CPPI announced today that it will be extending the curtailment at its BCTMP mill by a further five weeks to September 9, 2019. Combined, the summer curtailments will reduce third quarter pulp production by an estimated 75,000 tonnes of NBSK pulp and 50,000 tonnes of BCTMP, respectively. Maintenance outages are also scheduled at the Prince George NBSK pulp mill 4 and at CPPI’s paper mill in September 2019, with a projected 6,000 tonnes of reduced NBSK pulp production and 4,000 tonnes of reduced paper production, respectively.

Towards the end of 2019 and into 2020, global pulp inventory levels are forecast to move towards a more balanced range reflecting a gradual drawdown of inventory that will include the anticipated impact of the conversion of two large NBSK pulp mills outside of North America to dissolving pulp by the end of 2019, as well as production curtailments. Given the impacts of recently announced sawmill curtailments and closures in the BC Interior, fibre costs are projected to remain under pressure as a result of an increased proportion of higher-cost whole log chips, which are in tight supply. Bleached kraft paper demand is anticipated to decline slightly through the balance of the year.