Housing is a key market for lumber.

West Fraser Timber Co. Ltd. says the worst is over in the forestry business as demand returns and lumber prices continue to rebound from one of the most devastating periods in the industry's history.

"We believe we can now see the light at the end of the tunnel in terms of the deep recession our lumber industry has suffered through since late 2006," West Fraser's CEO Hank Ketcham told analysts on a conference call Monday.

The Vancouver company reported its first quarterly profit in two years on Friday, making $19 million, after a loss of $20 million in the 2009 first quarter.

North American lumber prices were up 31 per cent during the first quarter of 2010, Ketcham said, and he expects prices to remain strong during the busy spring building season.

Higher prices are being fuelled by an imbalance between a depleted supply and pent-up demand.

Dealers and wholesalers are beginning to restock lumber in advance of the spring and summer construction season, but inventories are restricted because forestry companies shut many of their mills during the recession and the slump in the U.S. housing sector.

Global factors

But temporary factors have also affected supply. These include a weather-related stop work order in the southern U.S., an earthquake in Chile, a port strike in Finland, and new log export tax in Russia, said Andrew Casey, vice-president of trade at the Forest Products Association of Canada.

"The question is how long does that shortage stay in place?" he said, adding the higher prices are encouraging, but it's too early to say whether they form a long-term trend.

Prices in March were so high that export duty rates on shipments from Canada to the U.S. will drop from 15 per cent to 10 per cent in May, marking the first time prices will have reached the $315 threshold since the Softwood Lumber Agreement between the U.S. and Canada came into effect in 2006.

If prices continue to rise, the duty could fall even further, to five per cent or nothing, in June.

Casey said the reduction in duties could help to offset the detrimental effects of the strong loonie and make Canadian lumber more affordable.

Ketcham said supply and demand are coming back into balance after industry-wide downsizing during what he called a "depression" in the industry.

The Canadian lumber industry has been hammered by the U.S. housing crisis, since the majority of its product is used south of the border.

To cope with a drop in demand, forestry firms have cut capacity by as much as 50 per cent, closing mills and laying off thousands of workers to try to stave off deeper losses.

Housing getting better

Ketcham said he believes the worst is over in the business and housing fundamentals will gradually improve as the U.S. housing market begins to improve later this year.

He said lumber prices will remain solid for at least the next couple of months but added that the improved pricing will encourage producers to ramp up capacity, which will dampen prices after the spring as new home construction remains weak.

"Housing starts in the U.S. are still near historically low levels and we believe it will be a long and bumpy ride before new home construction returns to a level that supports long-term demand."

Pulp and paper prices will also continue to improve through the third quarter of the year, reflecting strong buying from China and extremely low pulp inventories, he said.

The company's Canadian mills were running at around 95 per cent capacity as it added a third shift at one of its Alberta mills during the quarter. Ketcham said they have sufficient log inventory to run at full capacity during the second quarter that ends June 30.

Meanwhile, West Fraser's mills in the U.S. ran at about 55 per cent capacity during the quarter because of weather-related slowdowns and are expected to ramp up to about 70 per cent production in the second quarter.

West Fraser has operations in Western Canada and the southern United States. Shares in the company moved up 70 cents to close at $44 apiece Monday on the Toronto Stock Exchange.