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Canadas Scotiabank Sees Lumber as 2013 Top Investment Pick

by

Jenna Bush

Investing in TimberBack in the Spotlight

In a recent statement, Canada-based Scotiabank declared that lumber will be investors top pick for the year ahead. According to the bank, a prolonged construction season and low inventory levels will spur investing in timber and bring lumber back into the investment spotlight.

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Patricia Mohr, economist at Scotiabank,said: “Of the 32 commodities in the Scotiabank commodity price index, the ones that I think will have the biggest price increases from December of this year [2012] to December of next year [2013] are lumber and oriented strand board (OSB).”

Analysts remarked that as lumber and OSB restore their position in the global commodities market, Canadians investing in timber will benefitfromthe countrys trading relationship with the two biggest consumers of these products the United States and China. With the US housing market making a comeback, demand for lumber and OSB both used in housing — is expected to be on the rise throughout 2013. Meanwhile in China, where lumber is used for scaffolding and concrete forms, rather than for wood-frame housing, analysts forecast a boost in demand as the country shows signs of gradual economic recovery after its prolonged growth slowdown.

Tight Supply-Demand Dynamic

While demand for lumber is expected to rise this year, supply is becoming shorter. As noted by ScotiabanksMohr, 140 sawmills have closed in the US and Canada over the last five years, creating a tight supply-demand dynamic which is expected to remain for the next several years. This market trend has helped boost prices of lumber in recent months. In Scotiabank’s commodity price index, forest products were the best performing sector in November 2012, climbing to 120.7 from 106.9 the previous November. On a yearly basis, lumber prices soared 44 per cent — the biggest annual gain since 1993.Scotiabank forecasts that the average cash price of lumber will be $360 per 1,000 board feet in 2013, up from $298 in the past year.

According to Mohr,the rise in timberprices is a sign of two dynamics a warmer than usual winter across much of the US which has prolonged the construction season, and the fact that buyers of timber productswere caught with low inventory levelsin anticipation of a winter construction slowdown. The Canadian banks economist outlined that the sentiment of decreasinglumber priceshas now changed to a sentiment that they are increasing. Accordingly, this year market participantswill likely bestocking up andinvesting in timber, expecting a further surge in prices.

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