Markets and Outlook
During the first quarter of 2013, Western continued to improve its product margins by directing our fibre resource towards the highest margin end use and maximizing the utilization of manufacturing assets. Coupled with strong log and lumber markets, the Company expects to generate strong free cash flow over the next several quarters. With no debt as at the date of this report, we are now well positioned to reinvest in the business and consider other capital allocation alternatives to enhance long term value for our shareholders. Our business strategy continues to focus on growing our four key lumber market segments: WRC, Japan, Niche and Commodity.
Demand for WRC continues to grow with improving US new home construction and increasing levels of US home renovations. Higher cedar log prices and good harvesting weather in the first quarter of 2013 has increased log supply, but continued strength of cedar prices suggest that supply growth hasn't exceeded demand growth. As we enter the peak season for WRC demand we anticipate prices to continue to improve from first quarter 2013 levels.
As forecast in our year-end report, lumber demand is increasing in Japan. February 2013 year-to-date housing starts are up 4% compared to 2012. As expected, the increased demand for wood products within the US has resulted in fewer log and lumber exports being available from the US to Japan and, as a result, lumber imports to Japan from the US declined 5% and log imports fell 3% in the first quarter of 2013 compared to a year ago. As a result we expect to see increased demand for our log and lumber products in Japan over the balance of the year.
Sales in the Niche market segment have been relatively stable so far in 2013. However our product and market mix is beginning to change to reflect market conditions. The North American market for higher grade Douglas fir and hemlock products used in appearance applications has not seen the same recovery as in the general US housing market. As a result, we have converted some of these logs into other products and markets at higher margins. We are seeing increased demand for Industrial products like timbers, rail ties and cross arms which is translating into higher pricing. The outlook for Europe, a high value market for Western, appears to be little changed from 2012, with recession concerns still an issue there.
The strengthening of North American Commodity pricing in the last quarter of 2012 and into the first quarter of 2013 has positively impacted all commodity pricing, regardless of market destination. Western continues to use its market flexibility to increase its exposure to the improving North American market. The US housing market has clearly regained its footing, although housing starts are still well below trend levels. Forecasters continue to adjust their housing start projections for 2013 upwards and, on average, are now predicting more than one million starts in 2013. Demand in the first quarter 2013 from China was strong for Western, reflected by increasing price levels. Recent concerns have surfaced that log inventories in China may be growing, suggesting a possible adjustment to lumber prices. We will continue to maintain our focus on margin for commodities, by shifting product and market mix to maximize margin.
In support of our growth strategy, we continue to position ourselves for the improving housing market by investing in capital projects to further enhance our margins through improved efficiencies and product grades ensuring our continued competitiveness in the global lumber markets. We expect that the strategic capital program will be funded by cash generated from operations.
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