Even as Canada's troubled lumber industry struggles under the weight of U.S. duties and slumping prices, shrewd investors are circling. During the past several months Vancouver billionaire Jimmy Pattison, for one, has been quietly picking up shares in Canfor Corp. and Slocan Forest Products Ltd., two leading B.C. producers. Mr. Pattison will say little about the move - he now owns roughly a fifth of both companies - noting only that he bought the shares for "investment purposes." Yet the lumber industry is hardly a stock market darling. As a result of the 27% U.S. tariffs, dozens of mills on this side of the border have been forced to close. Only a handful are profitable.

Meanwhile, lumber prices hover at rock bottom levels. So why is Mr. Pattison so interested? According to some analysts, the tide is about to turn for the sector. The key is the softwood lumber dispute, which appears to be headed for a resolution. Indeed, Grant Aldonas, under-secretary for international trade at the U.S. Commerce Department, predicted there could be a deal within the next three weeks. Freed of the duties, Canadian producers would be able to get back on solid financial footing. Questions about their value would also go away. And that, according to some analysts, could set the stage for a wave of consolidation that could reshape the terrain of the industry.

"Consolidation has been assumed for a long time, but once you remove some of the uncertainty, you get to a point where you can put some of these plays together," said Kevin Mason,an analyst at Equity Research Associates. "First you need a permanent solution to the softwood lumber dispute - that's the wild card," added Craig Campbell, a partner with PricewaterhouseCoopers' global forest and paper practice. "Nobody's going to buy any of these companies when there's the uncertainty of a duty." There is no question the entire North American lumber industry would be healthier if there were fewer players, analysts said. The sector is badly fragmented, with no single player holding more than 10% of the market, according to Mr. Campbell. "So what you get is this overcapacity problem," he said.

"Everyone produces at whatever level they want. Anyone can add a second or third shift or build a new mill." That is the main reason lumber prices are falling amid the biggest U.S. housing boom in history. Producers are also being drawn to the altar for more immediate benefits. "By combining companies you can achieve synergies," Mr. Mason said. "You don't need two head offices, you don't need two sets of white-collar managers. Where mills [of potential partners] are close together there is the opportunity to eliminate a lot of duplication." Some of this country's most efficient operators are based in the B.C. interior. Companies such as Canfor, Slocan and West Fraser Timber Co. Ltd. run mills in many of the same regions, thus making logical candidates for a three-way merger, according to Mark Bishop, an analyst at Raymond James Ltd. "You have Canfor trucks driving right by a Slocan mill on the way to their own mill," added Mr. Mason.

"By combining organizations you eliminate the need for two head offices, two sets of management. There are opportunities to drive costs out of the system." Interestingly, many of the forces pushing lumber companies together have been in place for some time. Skeptics point out there is no reason to believe a consolidation tsunami is about to start now. "I am not so convinced we are going to see a breaking of the logjam and that all of a sudden the impediments to consolidation are going to disappear," said Reid Carter, an analyst at National Bank Financial. Despite the positive noises coming from government, Mr. Carter doubts the lumber trade dispute will be settled anytime soon. The two sides have been arguing for nearly two years and could very well keep at it for some time to come. On top of that, British Columbia and other provinces are still trying to map out major changes to forest policy that will have an impact of the forest industry.

"The question is, what are you buying when you buy one of these companies?" he asks. He also doubts the benefits of consolidation that some are predicting. Even where two companies have similar operations in the same region, operational efficiencies from joining them would likely be limited, he said. "There would be some, but not enough to make me go out and buy the stock. For the investor, I don't think there's a significant upside."