If a Tree Falls in the Forest: Softwood Lumber Trade

Overview:

• Softwood lumber trade between Canada and the U.S. is one of the most significant issues for investors in the North American forest products sector.
• Diversification efforts and a focus on capital structure flexibility leave many leading Canadian lumber producers well-positioned to address growing U.S. market access restrictions.
• We see no clear path towards a negotiated settlement with a bilateral trade deal over our forecast horizon, but in some cases, we believe that valuations are discounting excessive risk.

The TD Cowen Insight

For Canadian lumber producers, U.S. market access restrictions are a long-term reality. We expect increasing duty rates plus an incremental tariff will be applied to Canadian lumber imports by the third quarter of 2025 (Q3/25). The Canadian lumber industry has diversified to mitigate exposure, and for companies with strong balance sheets, recent valuation contraction offers an attractive entry point.

Proactive Diversification Efforts are Key to Mitigating Risk

The Canadian softwood lumber industry is better positioned to address protectionist U.S. trade actions than previous cycles led by diversification efforts. Short-term hurdles are notable (demand headwinds, rising U.S. duties, and expected incremental tariffs) but for some companies, we believe that recent valuation contractions discount excessive risk.

What Is Proprietary?

We surveyed management teams across the Canadian lumber industry regarding key trade issues. Some notable conclusions:

• A mutual lumber trade agreement between Canada and the U.S. is not expected in the near- to medium-term but is more likely in five years.
• If an eventual bilateral trade agreement is reached, an expectation that the percentage of duty deposits refunded to Canada will be below the 2006 precedent.

Financial and Industry Model Implications

We include an incremental U.S. 25% tariff applied to Canadian lumber imports (Section 232 investigation) starting Q3/25 in addition to cumulative countervailing duties (CVD)/anti-dumping duties (ADD) collection rates expected to rise to almost 35% for most sawmills by mid-Q3/25. For the average Canadian sawmill, we estimate that Canadian lumber prices would need to rise 30% from current levels to pass on the increase to duty deposit rates plus the incremental tariff to customers.

Our estimates do not include a refund of duty deposits held in escrow since 2017. Assuming a 50% refund in five years, the present value of after-tax duties collected to date is equivalent to an average 11% of enterprise value and 15% of market capitalization for exposed equities in our coverage set.

What To Watch

• Clarity on the Section 232 investigation,
• Negotiations towards an eventual bilateral trade deal are dependent on political will (in short supply for now) and
• Incremental Canadian sawmill curtailments and closure announcements.

Stock Conclusions

We place lumber-weighted equities in two buckets:

• those with balance sheet strength and diverse operating platforms that can mitigate exposure to lumber trade friction and
• those that have concentrated exposure to Canadian lumber and limited capital structure flexibility.