Morning Wood


The lumber market has been …. abysmal following the housing crash, mortgage crisis, and lack of development in the USA.  However, the recent tragedy in Japan has in my eyes provided a great opportunity to make some profits. A lot of traders are looking for bargain bin uranium stocks, a play I am also interested on nibbling on a will follow up with later, Japan’s lost refining capacity – refiners or oil/gas plays, or simply holding cash uncertain about the direction of the Dow Jones in the coming weeks. Either way, a lot of this sell off and consolidation can be attributed to the recent news/events – also a large increase in volatility.

I caught myself off guard earlier in the week in deep thought about the nuclear situation unfolding in Japan and realized, holy shit I almost forgot there was a tsunami. Refiner plays etc. are great for the short term – but long term one area I am proposing for significant growth is Lumber. Japan has known they have lived in an area prone to seismic activity. Consequently, a lot of their larger infrastructure and industry took into account earthquakes and disaster design redundancy and codes. The real long term affect besides on the environment, water, and food is the cost of rebuilding what once was. Personally, I think this will translate directly into a surge in demand for lumber.

There are many options for the direction of trading on this hypothesis. The majority may look directly to a Lumber ETF such as NYSE:CUT.

I am going to look at how it will affect one industry that has been getting beat down by reduction in demand for the past couple of years. Integrated Pulp&Paper companies such as Abitibibowater (TSE/NYSE:ABH), NewPage, Domtar, Tembec, and others have their paper mills supported by typically both power generation facilities and sawmills. The sawmills feed their byproducts (wood chips) to the mills for processing and in turn, paper production. Combine the lack of demand for lumber cutting into their margins, the lack of desire for independent forestry companies/localized woodlot owners to harvest their wood, and the continuously declining newsprint industry at the hands of technology, and forecasts may not be exactly as they seem. North American and Scandinavian producers are eyeing a number of global markets including the Caribbean, India, England, and China.

I believe that the profit margin of such integrated mills will grow in the immediate future. Integrated paper/forestry companies have a huge reduction in input costs from an increased demand for lumber. They benefit from the selling price of their lumber production, but and increase in supply – a supply that is destroyed when the lumber market becomes low enough that private woodlot owners cannot be encouraged to harvest their stock. This translates into lower input costs for the paper mills.

Abitibibowater is one company that could see significant growth in value over 2011. Recently emerged from bankruptcy, the restructuring has led to the removal of dead weight to coincide with the declining paper industry, but also removal of high operating cost institutions. Given their recent agreement with the Ontario Government, there is still a lot of optimism surrounding the forestry products industry in Canada. Bowater plans to escape debt by the end of 2011 and pending a double dip recession, could be a stock to provide you with some long-term growth. Their earnings and asset value, although depreciating with time, shut mills provide salvaging opportunities for other so it isn’t a total loss of investment.

Will follow up this weekend with uranium, Libya, Japan, and general US Economy thoughts.

Holding Silver, Delta Airlines calls, large cash position (>85%).


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