OREANDA-NEWS. September 03, 2012. West Fraser Timber Co. and Western Forest Products Inc. are leading Canadian lumber producers to the biggest combined profit since 2006 as mills run at five-year highs to feed a U.S. housing rebound and near-record Chinese demand, as Western Forest Products Inc. said in the press release received by Lesprom Network.

Lumber mills in British Columbia, the country's leading forestry region, ran at 86% of production capacity in the five months through May, compared with 82% for all of 2011, said the Western Wood Products Association. Lumber futures rose to a 15-month high on Aug. 15 on the Chicago Mercantile Exchange.

The industry is recovering from losses and mill closures during the four-year U.S. housing bust amid resurgent newhome sales and building activity south of the border. Some producers are also capitalizing on orders from China for imported Canadian lumber even as the Asian country's economy slows.

"We're extremely early on in the lumber cycle and it has the potential to be a four-year run," said Paul Jannke, a lumber market analyst at Westford, Mass.-based Forest Economic Advisors LLC. He estimates the industry in Western Canada in 2012 will probably earn the most since before the housing decline and that next year is looking even better.

Shares of West Fraser (WFT/ TSX), the largest North American maker of softwood lumber used in home construction, have advanced 34% this year and Western Forest (WEF/ TSX) has gained 31%, while the S&P/TSX Composite Index has gained 1.1%. West Fraser closed at \\$55.65 yesterday, up 25?, while Western Forest rose to USD1.11.

"For lumber producers, it's really the combination of China and the U.S. that's been so spectacular," said David Elstone, an analyst at Gibsons, B.C.-based research firm ERA Forest Products Research. ERA recommends holding West Fraser shares.

"We have market diversification that we've never seen before, with the U.S. as the biggest, China in second, and we still have Japan," he said.

West Fraser's B.C. and Alberta mills operated at full capacity in the second quarter, the company said on a conference call last month. The Vancouver-based company's earnings before one-time items will more than double to USD 59.8-million this year, according to the average of four analysts' esti-mates compiled by Bloomberg. Profit will advance to USD 191.5million next year, the highest since 2006, analysts said.

"We're price takers and we run our business on cost control," said West Fraser chief financial officer Larry Hughes. He declined to comment on the outlook for earnings.

The company mostly harvests trees in B.C.'s interior. Western Forest, which operates in the province's coastal forests, will see its earnings climb 52% this year and more than double in 2013 to the highest since at least 2004, analysts said.

Stronger U.S. demand for building materials is also helping Toronto-based Norbord Inc. and other makers of oriented strandboard, a plywood substitute. Norbord (NBD/TSX), which has its biggest operations in the southern U.S., has doubled this year to USD 15.91 on higher prices for the material.

While U.S. housing starts fell 1.1% in July versus June, the number of building permits climbed to an annual rate of 812,000 last month, the most since August 2008, ac-cording to Commerce Department data. That suggests residential construction activity in the largest export market for Canadian lumber may extend gains in the second half of the year. Historically low borrowing costs are among reasons that demand for homes in the U.S. is increasing.

About 36% of B.C. lumber was exported to the U.S. in the first six months of this year, according to FEA's Mr. Jannke.

Canada ships higher-quality lumber to the U.S. for use in new-home building and residential renovations, according to Elstone. Much of the lumber destined for China is lowerquality wood from trees killed by mountain pine beetles, he said. The infestation in interior B.C. is the world's worst. The affected lumber is used in residential construction and for making concrete forms.

Canadian lumber exports to China were about 1.2 billion nominal board feet in the second quarter, the second-highest quarterly tally on record, Mr. Jannke said. By comparison, the quarterly average in 2009 was about 400 million board feet.

Chinese demand for B.C. lumber is showing signs of easing, said Bryan Yu, Vancouver-based economist at Central 1 Credit Union, a trade association for credit unions in B.C. and Ontario.

"China has really stepped up in recent years to support our forest industry," Mr. Yu said. "We are now seeing some cresting of lumber exports to both China and the U.S."

"There are risks to the lumber recovery, such as the U.S. election and the health of the global economy," Mr. Elstone said. "But this is a cycle that looks like it's turned for the better."