Canfor Corporation is reporting a net operating loss of $21.5 million in its first quarter of 2012.

In comparison, the company reported a net loss of $63.1 million in its fourth quarter of 2011.

Commenting on the quarter, Canfor’s President and CEO, Don Kayne, said, “While it was encouraging to see improved lumber prices in North America in the first quarter, the effect of weak low grade prices in China offset some of these gains. With inventories in China returning to more normal levels, we are anticipating an improvement in low grade lumber prices to China in the second quarter.” Mr. Kayne added that progress continued to be made with respect to improving the company’s cost performance, “We continue to see a trend of steadily improving productivity and unit conversion costs at our lumber operations, which reflects both our targeted strategic capital investments and a strong focus on continuous improvement.”

Canfor completed the acquisition of Tembec Industries Ltd.‘s southern British Columbia Interior wood products assets late in the first quarter. Commenting on the purchase, Mr. Kayne said, “This is a key acquisition that supports our long term strategy, particularly with respect to increasing our long term supply of high quality green fibre.”

First Quarter Analysis

Lumber markets were mixed in the first quarter of 2012, as a modest improvement in North American market conditions contrasted with a weaker market for lower grade products in China, where the effects of a significant inventory build ahead of the Lunar New Year and slower demand weighed heavily on prices through much of the quarter. U.S. housing activity saw a small increase, in part due to unseasonably mild weather, with housing starts for the quarter averaging 687,000 units (seasonally adjusted annual rate), up 3% from the previous quarter. Canadian housing starts also saw a modest increase from the previous quarter.

Despite an increase in North American prices, overall lumber sales realizations were largely unchanged from the previous quarter due to lower offshore realizations, particularly for low grade products. The average North American benchmark Western SPF 2×4 #2&Btr price increased US$28, or 12%, to US$266 per Mfbm, although increases for most other widths and dimensions were less marked. Prices for most SYP products saw solid increases. For Northern Bleached Softwood Kraft (“NBSK”) pulp, weak global demand saw prices fall from the previous quarter, with U.S. prices down US$50 per tonne. Compounding challenges for Canadian producers, sales realizations were negatively impacted by a stronger average Canadian dollar which was up over 2 cents, or 2%, from the previous quarter.

Lumber shipments were in line with the previous quarter at just under one billion board feet, while production was up 17%, reflecting continued improvements in productivity in the current quarter as well as downtime taken over the Christmas period in the previous quarter. Lumber unit manufacturing costs saw a decrease compared to the previous quarter, reflecting reductions in unit cash conversion costs, largely resulting from the increased production levels, and a reduction in unit log costs. However, results in the lumber segment were negatively impacted by lower prices for residual fibre products, reflecting lower prices for sawmill residual chips (related to lower NBSK pulp sales realizations).

Pulp shipment and production levels were well up from the previous quarter, mostly reflecting downtime taken in the prior quarter at Canfor Pulp’s Northwood pulp mill for capital upgrades. Improved pulp unit manufacturing costs in the current quarter reflected the higher production levels as well as lower residual chip costs.

Canfor completed further capital projects in the quarter as part of its $300 million, three-year strategic capital investment program at its lumber operations, including a planer upgrade at its Grande Prairie sawmill. This project was completed on time and on budget and is exceeding pro forma targets.

Looking ahead, the North American lumber market is projected to continue its modest recovery, while low grade prices to China are projected to see a marked improvement in the second quarter. The global softwood pulp market is anticipated to improve modestly through the second quarter.

Source: Canfor Corp.