Canfor Corporation has reported its second quarter 2021 results:
Overview
- Record quarterly reported operating income of $1.04 billion driven by unprecedented high lumber prices and a strong operating performance across all regions; record-high quarterly sales of $2.5 billion
- Record shareholder net income of $727 million, or $5.81 per share
- Net cash of $916 million at June 30, 2021; US$150 million repayment of term debt in the current quarter
- Cumulative cash deposits of $645 million on countervailing and anti-dumping duties at June 30, 2021
Financial results
Reflecting record-high lumber segment earnings and improved pulp and paper segment results, the company reported operating income of $1,041.3 million for the second quarter of 2021, $438.7 million higher than the operating income of $602.6 million reported for the first quarter of 2021. For the lumber segment, earnings increased $393.8 million quarter-over-quarter, to an all-time high of $1,000.5 million.
Commenting on the company’s second quarter results, Canfor’s president and chief executive officer, Don Kayne, said, “Our lumber business generated exceptional financial results in the second quarter, with our solid operational performance enabling us to capitalize on strong global lumber fundamentals resulting in record-high operating earnings. Our pulp business successfully leveraged favourable pulp market conditions and improved productivity to record strong financial results for the quarter.”
Global lumber market conditions remained very strong in the second quarter of 2021, as tight supply coupled with significant demand drove global benchmark lumber prices to new unprecedented highs. This record pricing, combined with moderately higher shipment volumes, substantially outweighed the impact of modestly higher log costs in Western Canada.
Continued strong North American market fundamentals reflected sustained high levels of new home construction activity, despite a slight pull-back in the shift to suburban areas, as coronavirus (COVID-19) restrictions were gradually lifted. Demand in the North American repair and remodeling sector also showed continued strength early in the current quarter, but weakened over the balance of the period.
For the second quarter of 2021, U.S. housing starts averaged 1,568,000 units on a seasonally adjusted basis, down two per cent from the previous quarter. Although well above the five-year rolling average of 1,308,000 units, current quarter U.S. housing starts were down nine per cent from the near 15-year high established in March. In Canada, new home construction remained strong despite a similar decline from the March peak; housing starts averaged 281,000 units on a seasonally adjusted basis for the second quarter of 2021, down eight per cent from the previous quarter, but still well above historical levels.
Offshore lumber demand and prices in Asia were also strong in the current period, with material price gains recorded in many regions, supported by lean inventories in the supply chain, coupled with steady consumption in the industrial and construction sectors. Western Europe and Scandinavian lumber demand experienced further growth in the current quarter largely in response to continued strength in the repair and remodeling sector in that region.
The North American Random Lengths Western Spruce/Pine/Fir (SPF) 2×4 #2&Btr price posted significant gains early in the second quarter of 2021, reaching a new record high of US$1,630 per Mfbm in early May before declining sharply through the balance of the quarter to end the period at US$875 per Mfbm. Despite this volatility, the Western SPF 2×4 #2&Btr price averaged US$1,342 per Mfbm for the quarter overall, up US$370 per Mfbm, or 38 per cent, from the previous quarter. The substantial increase in the company’s Western SPF lumber unit sales realizations primarily reflected this record-high North American benchmark pricing, as well as significantly improved offshore unit sales realizations, particularly in Japan.
The Southern Yellow Pine (SYP) East 2×4 #2 price followed similar trends to Western SPF, climbing to a record of US$1,400 per Mfbm mid-May and ending the quarter at US$755 per Mfbm. As a result, the North American Random Lengths SYP East 2×4 #2 price averaged US$1,163 per Mfbm, broadly in line with the previous quarter. However, pronounced price increases for wider-width dimension products, some of which reflected seasonal factors, contributed to a significant increase in the company’s SYP lumber unit sales realizations.
The company’s European lumber unit sales realizations also experienced a notable uptick compared to the previous quarter, largely driven by ongoing increases in European market demand and the record North American U.S. dollar benchmark pricing environment, offset somewhat by the traditional quarterly lag in European contract pricing and the timing of orders (versus shipments) to North America.
Total lumber shipments, at 1.54 billion board feet, were six per cent higher than the previous quarter largely due to moderately higher North American shipment volumes in the current quarter, while European shipments were comparable quarter-over-quarter. In North America, increased shipments, for the most part, reflected strong demand combined with the gradual release of inventory early in the quarter as trucking availability in the U.S. South and transportation networks in western Canada slowly returned to more normal service levels in April and May.
Total lumber production, at 1.51 billion board feet, was two per cent higher than the prior quarter principally reflecting modestly higher SYP production following capital-related downtime at the company’s Camden and Estill mills in the previous quarter. Western SPF and European lumber production were broadly in line with the first quarter of 2021.
Lumber unit manufacturing and product costs were broadly in line with the prior quarter, as the per-unit impact of gains in productivity and the benefit of stable log costs in the U.S. South and Europe offset modestly higher log costs in western Canada.
Looking ahead, with the sharp correction in benchmark lumber prices across North America in recent weeks, market fundamentals in that region are forecast to be more challenging through the third quarter of 2021, as a result of reduced consumer spending in the repair and remodeling sector and some moderation in new home construction activity.
Solid offshore lumber market demand and pricing in Asia, most notably Japan, is expected to persist into the latter half of 2021, supported by increased building activity and lean inventory levels in the region. European lumber markets are projected to remain strong through the third quarter of 2021 with steady consumption in the residential and construction sector. As a result of the traditional lag in European contract pricing, third quarter pricing is anticipated to exceed current quarter levels.
Extreme wildfire conditions in western Canada stemming from a heat wave across the region in early July have significantly impacted the supply chain, with the company experiencing limited and intermittent rail service to and from its western Canadian sawmills and pulp mills. As a result of these transportation challenges and with mill inventory levels nearing capacity, the company recently announced short-term production curtailments at its British Columbia sawmills beginning July 26, 2021, reducing production by approximately 115 million board feet in the third quarter of 2021. While the company continues to closely monitor the situation, shipments of lumber and pulp and paper are also expected to be negatively impacted in the third quarter of 2021 as a result of the rail disruptions.
Commenting on the company’s outlook for the third quarter, Canfor’s president and chief executive officer, Don Kayne, said, “With the summer heat and wildfire conditions rapidly upon us, our top priority remains to ensure the health and safety of our employees. We continue to actively monitor the ongoing weather-related challenges, particularly with regards to transportation constraints, and remain prepared to take further action as required to ensure minimal disruption to our employees, customers and operations.”
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