September has been a tough month for almost every segment of the Paper and Forest Products industry. OSB producers look interesting at these levels, and our September products industry. OSB producers look interesting at these levels, and our September 16th report entitled “OSB — The Next Big Call” advised accumulating a position over the next few months. With most of the bad news priced in for this segment, we don’t expect much downside from this point on, and the upside for OSB producers is substantial (especially looking out two to three years).
Timber REITS should perform well, matching housing’s slow but steady growth. Upside exists in U.S. South timberland, both in terms of volume and log prices. Pulp stocks appeared to be headed for trouble earlier this year, but, with a collection of unexpected supply disruptions, softwood prices have held together very well. Pulp prices will base out in Q4 and should improve in the first half of 2015. It is approaching the time to go long the pulp producers.
For packaging markets, oversupply remains a concern. Lately, the willingness of the big producers to manage supply to match demand (including allowing the free riders to continue to run full) is being brought into question. The potential for valuation uplifts from an MLP conversion has supported share prices, but such conversions are a long way off. Packaging names appear fully valued for the time being, and downside risks to prices are growing.
Caution is advised.