BAY STREET-Will lumber demand lead to China investments?

Investors in Canada's forestry sector have feasted of late on Chinese demand for lumber and pulp, and a few of them are likely licking their chops at the idea China will also want to buy the mills.

They may have to wait a while for that meal.

Canada's forestry sector is no stranger to foreign investment, and China's demand for raw materials and energy has seen it take stakes in areas such as Alberta's oil sands and British Columbia's natural gas.

Lumber sales to China were a nonfactor for most Canadian producers until last year, but they now pad the bottom lines of West Fraser Timber Co Ltd (WFT.TO), Canfor Corp (CFP.TO) and others. Demand is expected to keep growing this year.

Pulp producers such as Canfor Pulp (CFX.TO) and Domtar Corp (UFS.TO) have benefited from the rise of China's middle class and urbanization, which are fueling demand for products such as toilet paper and tissue.

But analysts caution it is yet to be seen to what extent demand for products will bring in Chinese or other Asian investors wanting to secure long-term supplies by owning the means of production.

We're seeing some on the pulp side, but not not really anywhere else, said Paul Quinn, a forest sector analyst at RBC Capital Markets.

Chinese textile maker Fulida Group this month purchased privately held Neucel Specialty Cellulose, saying it needed the Neucel's mill on Canada's Pacific Coast to ensure an economic supply of pulp needed to make rayon.

With the purchase of Neucel, Fulida gains a stable supply of dissolving pulp along with cost advantages and quality assurance which extend the value chain of our business, Fulida Chairman Jianer Qi said in announcing the deal.

Asia Pulp and Paper's purchase of two Western Canadian mills last year - one a pulp facility, the other a combined pulp and paper plant - was seen by analysts as driven by increasing Chinese demand.

APP is a unit of Indonesia's Sinar Mas.

The recent deals mark a dramatic change from the past when many Canadian mills were only purchased so the buyers could move the machinery to other countries, said one analyst, speaking on background.

It used to be they just wanted them for the parts, he said.

IF PULP, WHY NOT LUMBER AND LOGS?

There are a number of obstacles that could discourage Chinese investors from making similar investments in the lumber sector, said Russ Taylor, president of International Wood Markets Group, a consulting firm.

I don't expect to see Chinese companies to buy into lumber mills or companies, as producing lumber is simply too complicated a business, he said.

China is seen as more interested in purchasing the raw materials, such as logs, but nearly all timberlands in Canada are owned by provincial governments and are not for sale.

The provinces sell cutting rights to lumber producers, but there are restrictions on log exports.

China is buying timberland in New Zealand, West Africa and other countries where they can export logs, Taylor said.

Purchasing of cutting rights for the purpose of exporting the logs might raise political hackles in Canada, according to analysts.

Canada gained a foothold in the Chinese market after Russia placed high tariffs on log exports used by Chinese sawmills, but Russia's expected entry into the World Trade Organization could bring those tariffs down.

British Columbia Forests Minister Pat Bell said recently he doubts Chinese buyers would be interested in buying whole lumber companies outright, but said they might take minority stakes in a bid to ensure long-term supplies.

Investment in paper mills would seem even less likely, if only because the supply and demand situation is very different than that for pulp and lumber, Quinn said.

Despite growing domestic demand, China exports paper and it is being accused by the United States and European Union of using unfair subsidies.

The lack of significant deals to date has not held back forestry stocks. The Thomson Reuters Canada Paper and Forest Products index, which includes Norbord Inc (NBD.TO) and Sino-Forest Corp (TRE.TO), rose more than 60 percent from July to early February. TRXCAINDEX.TRXFLDCAPM31

So perhaps hungry forestry investors should just content themselves for now by reading their investment statements.