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Forget Peak Oil, Peak Lumber Is Coming


The mountain pine beetle is ravaging Canadian forests, leading a long-term bull market in lumber.


Natural Resources Canada reports that:

British Columbia is currently experiencing a Mountain Pine Beetle outbreak beyond any bark beetle epidemic recorded in North American history. This eco-system altering epidemic is causing widespread mortality of the lodgepole pine forests, the province's most abundant commercial tree species. At the current rate of spread, 50% of the mature pine will be dead by 2008 and 80% by 2013. The consequences of the epidemic will be felt for decades in British Columbia.

According to Shawn Hackett, president and CEO of Hackett Financial Advisors, a Florida-based money-management firm with a focus on agricultural commodities, the beetle infestation has caused "irreversible long-term damage" and presents a "catastrophic situation for future lumber supply."

"Not many people know about this yet," Hackett tells Minyanville. "The pine beetle issue is an incredibly bullish long-term factor. With the crashing lumber market, I'd be buying lumber even without the infestation. But this is an additional reason why lumber prices are going to skyrocket."

Hackett says that one can argue when the market will start to respond to the pine-beetle infestation, but there's no argument that it's already taken place.

He explains:

It's all due to a strange change in weather patterns. No one knows why. But it has caused the beetles to go into areas they normally don't. The weather has created an unprecedented situation; we've never seen this kind of thing in Canada before. The pine-beetle crisis is an extenuating long-term supply issue and should create a record bull-market move for a long, long time.

As for lumber demand, Hackett notes that we hit a trough of existing new-home construction of 500,000 in 2009, a level not seen in 40 years.

He points out:

It can hardly get much lower. Worst case scenario, we'll hang around that level; it likely will no longer be falling like it did in 2007 and 2008. At some point in the future, we'll see an increase in construction, and eventually, we'll get back up to a million or a million-and-a-half, and any kind of growth like that that will require lumber supply. However, the pine beetles will have substantially reduced capacity from Canada at a time when we'll be seeing growth in the industry. Probably not this year, but I'm looking a few years out. Canadian sawmills will reduce supply further, either by closing or reducing hours, which will contract the amount of lumber being produced. Given the barriers to entry, those mills that got out will take some time to get back in. And that's when lumber prices go into hyper mode.

Projections from the International Wood Markets Group in Vancouver, BC paint a quantitative picture of Canadian mill shutdowns.

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