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Q1 expected to be an improvement over Q4 2006

Overall, we believe that first-quarter earnings will be stronger than Q4’06, except for OSB producers. Our EPS estimates show this improvement, noting that most of our forecasts fall close to the cons…

Overall, we believe that first-quarter earnings will be stronger than Q4’06, except for OSB producers. Our EPS estimates show this improvement, noting that most of our forecasts fall close to the consensus average. The Canadian dollar weakened throughout the quarter, averaging US$0.854, down 2.8% from Q4’s average of US$0.878. We note that most exchange rate sensitive forest stocks have made impressive share price gains since late November. Recently, however, the Canadian dollar has strengthened, pushing past US$0.88 last week. In Q1, the price of most forest product commodities increased or held flat, with the exception of panels and paper, which continue to outperform. Lumber prices were up 3.2% q/q for W. SPF 2×4, while its eastern cousin increased 0.8% q/q and lumber studs were up 8.1% q/q. Wide widths were up q/q with 2×10’s up 8.0%. Panel prices were mixed q/q, with OSB down 12.7% q/q Western 1/2″ 5-ply up 4.8% and SYP plywood 10.7% higher. Pulp prices tracked up in Q1, with North American and European NBSK pulp up 2.1% q/q and 3.5% q/q, respectively. Pulp pricing momentum continues with announcements of a US$20 per tonne increase in North American and Europe currently being planned for April. The most recent prices from Foex Indexes Ltd. show NBSK prices up US$31 per tonne in North America and up US$37 per tonne in Europe since the beginning of the year. Groundwood paper grades were down sharply in Q1, with newsprint down 5.0%, SC-A down 7.2% and LWC down 4.0%. Uncoated freesheet prices also weakened, with 50 lb offset rolls decreasing 3.4% q/q. Packaging prices were flat, with linerboard and medium posting no change in the quarter. Going forward, we see little positive pricing momentum in forest product commodities, with the exception of NBSK pulp. And with the recent strengthening of the Canadian dollar, we expect Canadian P&FP company shares to weaken. We remain underweight on this sector.