Replies to post #1669 on The Rising Influence of Rising Affluence

[DewDiligence]

PCL—How much weight do you put on this pine beetle issue? It seems like right now it is helping PCL because it is hurting the Canadian companies. But if I recall this is becoming an issue in regions like Montana as well, correct?

The mountain pine beetle is indeed providing a consequential boost to PCL’s long-term prospects; please see the graphic in #msg-47898395 for some startling factoids.

PCL’s own timberlands have not been adversely affected by the mountain pine beetle because, unlike government-owned timberlands, they are actively managed. I.e., if PCL notices an insect infestation, workers can immediately clear cut the stand to prevent it from spreading.

[DewDiligence]

PCL—I understand that some of the operating activities qualify as REIT status, while others like the manufacturing do not. Is this why the dividend paid can remain consistent rather than fluctuating to be a particular % of income (as I thought REITs had to do)?

The taxable manufacturing operations are a very small part of PCL’s overall operations, so they have little effect on cash flow and dividend payments.

REIT’s do not have to maintain a constant dividend payout; rather, what they must do to maintain tax-exempt status is distribute at least 90% of GAAP net income to shareholders each fiscal year. Due to the way GAAP net income is defined for the harvesting of timber, PCL’s cash flow from operations typically exceeds GAAP net income by a wide margin, making the 90% threshold easy for PCL to satisfy.

[DewDiligence]

(PCL)—Wood is a player in The Global Demographic Tailwind and
the mountain pine beetle is changing the way the game is played.

http://online.wsj.com/article/SB10001424052748703673604575550140147596132.html

›Canada's Mills Lumber Back To Life, Fueled by Chinese

NOVEMBER 2, 2010
By JOEL MILLMAN

QUESNEL, British Columbia—Timber giants, squeezed by the twin tongs of a U.S. housing slump and a global recession, are starting to stir again in Canada's north woods thanks to insatiable demand from China.

Here in the Lodgepole pine forest 500 miles north of the U.S.-Canada border, workers at one mill move 40,000 logs a day through an assembly line, producing 13-foot-long studs for the Chinese construction industry. Most of the wood will be used to build scaffolding or the forms that concrete is poured into. But the mill's owner, Canfor Forest Products Inc., hopes to be able to export other products, too.

In the meantime, the loggers are grateful for the Chinese demand. The Lodgepole stands were infested with the mountain pine beetle over the past decade, and the voracious bugs killed off trees across millions of acres, leaving the timber prone to splintering. The combination of the bugs' raging appetites and Chinese builders' prodigious output means that producers here will export every log they can process.

Canfor's Quesnel operation is one of several recently shuttered mills around the province that have sprung back to life. The company eliminated 180 high-paying jobs when it closed the mill in January. But most of those workers were called back to their jobs in June when the mill was refitted to service the China trade.

Another company, Western Forest Products Inc., took one of its Vancouver Island mills out of mothballs last month. The mill in Ladysmith called back about three dozen sawmill workers to slice hemlock exclusively for Chinese customers. Another WFP mill, which is about to start production nearby, will send about half its output to China. Altogether, the company expects to export more than 130 million board feet of lumber to China from British Columbia in 2010.

Country-wide, Canada exported 1.6 billion board feet of lumber to China last year. That was an 800% increase from 2006, when just 210 million board feet were sent there, and about 95% of the exports were from British Columbia.

"With China, we're 70% ahead of last year's output," says Forests and Range Minister Pat Bell, British Columbia's top forestry official. He estimates lumber sales to China this year will reach 2.5 billion board feet.

U.S. timber giant Weyerhaeuser Co. is also benefiting from increased exports. Sales to China from operations in Princeton, British Columbia, have doubled, says Wayne Roznowsky, a Weyerhaeuser spokesman, accounting for about 20% of the Canada unit's exports. Weyerhaeuser isn't increasing capacity or adding shifts in the province, Mr. Roznowsky says, but "It would be fair to say that offshore markets, including China, have helped avoid downtime and layoffs."

The fragility of Western Canada's timber industry is a big change of fortune. For more than a decade, lumber companies were flooded with demand from U.S. home builders. In 2005, the year U.S. housing starts peaked at 2.5 million, Canada's western-most province supplied 17 billion board feet of lumber to its southern neighbor.

"The U.S. was so reliable, it was reliable to a fault," says Roger Perry, the general manager of Western Forest's Cowichan Bay sawmill on Vancouver Island. Today, instead of simply filling limitless orders for the U.S., he has to be more creative. To sort hemlock logs as they float down from coastal logging operations, his crews run trunks past a computer scanner that identifies the various grades of fiber within the wood. Laser beams then guide saw blades to each cut, peeling off lengths of lumber marked for disparate buyers world-wide.

Besides China, the mill has lately tapped such other export markets as Dubai and Saudi Arabia, which were attracted to Canada this year in the wake of Chile's March earthquake, which closed ports in that country.

British Columbia's Chinese lumber boom isn't solely a result of the slowdown in U.S. demand. In part, Canada has stepped in to fill a gap left when Russia imposed a 25% export tariff on logs heading to China. The Russians were trying to encourage more direct investment in Siberian sawmills, and they got it, mainly from Chinese companies. Until that production comes on line, Canada has leapt to fill the breach.

But more importantly, British Columbia has spent the better part of a decade lobbying Chinese officials to adopt a "Wood First" program to mitigate the effects of global warming. Touting timber as an alternative to steel, glass, and especially concrete, Canadians have sent teams of engineers and lumber experts to persuade officials in cities like Shanghai and Chengdu to adapt municipal building codes to allow for more wood construction in multistory structures.

In some cities, Canadians are building demonstration models of six-story apartment houses and other public buildings to show what wood can do. They've also argued that wood is a safer alternative for use in earthquake-prone areas.

Canfor even launched "Canfor College," working with U.S. companies like toolmaker Stanley Black & Decker Inc., to teach developers how to use more Canadian wood in millwork like cabinets and molding, as well as for floors and walls. That helps to get the Chinese to buy more of the quality hardwoods that Canada specializes in rather than just clearing Lodgepole forest of the "waste wood" left by beetles.‹

[DewDiligence]

PCL sells $575M of 10-year bonds at 4.7%:

http://www.reuters.com/article/idCNN0857795820101108

http://finance.yahoo.com/news/Plum-Creek-Announces-Pricing-bw-772531492.html?x=0&.v=1

The bond offering will enable PCL to close out its revolving credit line, as discussed at the bottom of #msg-56000617.

[DewDiligence]

Consistent with prior guidance, PCL closes $600M credit line at LIBOR +2%:

http://finance.yahoo.com/news/Plum-Creek-Closes-New-600-bw-713348876.html?x=0&.v=1

[DewDiligence]

(PCL)—Lumber Trades at 5-Year High

[See #msg-56227280 for a related story, and chase the link below for the lumber chart.]

http://www.bloomberg.com/news/2011-01-05/lumber-booms-in-midst-of-homebuilding-s-bust-chart-of-the-day.html

›By David Wilson - Jan 5, 2011

Lumber has bounced back to prices seen during last decade’s boom in U.S. housing even though the homebuilding industry, one of the biggest sources of demand, is still in a bust.

Lumber traded yesterday at $340 per 1,000 board feet -- the highest price since May 2006, when starts were more than triple their current pace. Futures jumped as much as 94 percent since June and rose by the exchange’s $10 daily limit three times in the past two weeks.

Growth in Chinese demand is behind the commodity’s rally [duh, no kidding], according to Peter Ruschmeier, an analyst at Barclays Capital. China is the world’s largest importer of logs and is reducing its dependence on Russia, the country’s biggest supplier, he wrote yesterday in a report.

“A multiyear upturn in demand and prices is likely for logs, lumber and other wood products” as China increasingly turns to Canada and the U.S. Pacific Northwest for imports, Ruschmeier wrote.

Earnings at Louisiana-Pacific Corp., Plum Creek Timber Co., Rayonier Inc. and Weyerhaeuser Co. are poised to rise because of this shift, according to Ruschmeier. Temple-Inland Inc. may also benefit to a lesser degree, he added.‹