Standard & Poor's gives a negative investment outlook for the forest products sub-industry in USA

Oct 09, 2006. /Lesprom Network/. Chartered financial analyst of Standard & Poor's rating agency Stuart J. Benway gives a negative investment outlook for the forest products sub-industry in USA. “We have a negative investment outlook for the forest products sub-industry. The sharp decline in the housing market is having a significant impact on demand and pricing for wood products. We think margins in the industry will be under pressure for the remainder of 2006 and into 2007 due to expected lower demand and prices for many forest products. Year to date through September 22, the S&P Forest Products Index was down 14.2%, compared to an increase of 5.0% for the S&P 1500. In 2005, the index was nearly unchanged, versus a 3.8% increase for the 1500. Demand for forest products is highly dependent on the construction industry, especially the home construction and remodeling segment. Forest products that are typically used in construction include lumber, plywood, oriented strand board (OSB) and engineered lumber. The strength in the housing market from 2001 through 2005 boosted demand for forest products, but we believe that supply is catching up at a time when the housing sector is in the midst of a steep downturn. Housing starts declined in six of the first eight months of this year, and, at 1.67 million units in August 2006, are well below the peak of 2.27 million units in January 2006. We look for housing starts to decline 9.2% in 2006 and fall an additional 12.8% in 2007, which is likely to lead to lower lumber and wood products prices. On a composite basis, lumber prices are down nearly 30%from their level of a year ago, when hurricane damage led to a spike in prices. The structural panel market is also likely to remain weak for the balance of 2006 and into 2007, in our opinion. Composite prices in this category rose sharply in September 2005 due largely to the impact of storms, but have declined dramatically since then, and are now down 50% from their high. In addition, more capacity is due to come on stream as producers of OSB are in the process of starting up a total of 11 plants between 2006 and 2008, with the potential to increase North American OSB capacity by almost 30% if they are all built as currently planned. Considering our outlook for a weak housing market and significant increases in wood products capacity over the next couple of years, we see the forest products sub-industry underperforming the S&P 1500 over the coming 12 months.”