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A Storm Surge for Wood Products?

By Isabelle Sender Large, integrated forest-products companies that produce wood for homebuilding have rallied recently on hopes that they'll benefit from rebuilding the Gulf Coast in the wake of Hurricane Katrina. Indeed, reports of skyrocketing real estate demand in the Gulf region are already appearing, as are rising housing prices even beyond the storm-affected area.

However, Standard & Poor's believes the downside for companies exposed to housing trends will likely outweigh any boost from post-Katrina rebuilding efforts, thanks to climbing energy prices and a likely slowdown in new housing starts nationally. S&P predicts that housing starts will fall from their current record highs, with 8.8% fewer starts in 2006 than in 2005, and an additional 4.8% drop in 2007.

CHAIRMEN OF THE BOARD. S&P equity analyst Stuart Benway says the number of houses rebuilt due to the "Katrina factor" will have minimal impact on the stocks of companies that make products used in housing construction. As Benway explains, even if post-Katrina rebuilding adds 1% or 2% to total housing starts in the next 12 months, companies such as Louisiana Pacific (LPX

; ranked 3 STARS, or hold; recent price: $26) and Weyerhaeuser (WY

; ranked 2 STARS, or sell; $65) will realize little or no benefit long term, in his opinion.

Both companies have dominant market share as producers and suppliers of a wood-based material called oriented strand board, which has generally replaced plywood and particleboard in constructing new homes. Louisiana Pacific has 25% market share and Weyerhaeuser a 15% market share of oriented strand board.

And prices are soaring for wood products since the storm hit land. Oriented strand board is up 30%, and lumber is 12% higher.

ENERGY ELEVATION. Traditionally, a price increase for major producers would be a net positive, Benway says. However, this one hasn't helped Louisiana Pacific or Weyerhaeuser, which are feeling the pinch of higher fuel prices to produce and transport their goods. S&P believes energy prices will remain elevated, though lower than currently, with a barrel of oil reaching $62 by yearend before falling to $52 by the end of 2006.

So, even though demand and prices for certain wood products are up, the costs to produce them are also rising -- and this could chip away at forest-products stocks.

Sender is a reporter for Standard & Poor's MarketScope

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