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Lumber's Horrible Market Can't Be Fixed With Band-Aids, BMO Says

Lumber's Horrible Market Can't Be Fixed With Band-Aids, BMO Says

(Bloomberg) -- Lumber companies curtailing near-term production to fix weak pricing is like "medics treating battlefield wounds with Band-Aids," according to Bank of Montreal analyst Mark Wilde.

Cuts have so far amounted to about 0.8% of annual production, but it is not enough, Wilde writes in a note. "They won’t stanch the bleeding in a horrible market" as the lumber "market is ugly -- very ugly," due to higher supply and weaker-than-expected demand, he said.

Lumber prices have fallen about 52% from their peak in May of last year, while the S&P/TSX Composite Forest Products index has followed along. This sell-off could be an opportunity, according to a note by Royal Bank of Canada analyst Paul Quinn. Canadian lumber producers have significantly underperformed and "analysis suggests that periods of weakness tend to be followed by higher than average returns for the industry," he added.

Lumber's Horrible Market Can't Be Fixed With Band-Aids, BMO Says

Wilde says the market could get worse on new supplies that are coming up, and the producers who are hoping to see a rebound in pricing in the second half of the year may have to change their mindset.

"We think producers need to think critically about their collective assumption” of a second-half rebound, Wilde said.

To contact the reporter on this story: Aoyon Ashraf in Toronto at aashraf7@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Jennifer Bissell-Linsk, Scott Schnipper

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