After four years of being the forgotten commodity, lumber is back in the spotlight, named Scotiabank's top pick for investors for the coming year.

"The investment sentiment has changed," said Patricia Mohr, vice-president of economics and a commodities market specialist at Scotia-bank. "Of the 32 commodities in the Scotiabank commodity price index, the ones that I think will have the biggest price increases from December of this year to December of next year are lumber and oriented strand board."

And British Columbia, with one foot in the U.S. lumber market and the other in the Chinese market, is expected to thrive as lumber's position in the global commodities market is restored.

Both lumber and OSB are used in housing, and with the U.S. housing market making a gradual comeback, demand is expected to rise. U.S. housing starts climbed from 612,000 units in 2011 to 861,000 this year. In 2013, Scotiabank forecasts U.S. housing starts will climb to 950,000. By 2014, they are expected to hit 1.1 million.

In China, lumber is used for scaffolding and concrete forms, rather than for wood-frame housing, but the demand there is great enough to have a significant impact on B.C. lumber producers.

Mohr said B.C. sold 2.3 billion board feet of lumber to China in 2012, a volume that translates into enough lumber to supply an additional 142,000 single family home starts in the United States.

At the same time demand for lumber is rising, 140 sawmills have closed in the U.S. and Canada over the last five years, Mohr said, creating a tight supply-demand dynamic which is expected to carry on for several years.

She noted that the standard lumber commodity, B.C. Interior western spruce-pine-fir 2x4s, climbed in price from a year-long average of $255 US a thousand board feet in 2011 to $298 US in 2012. She expects the average WSPF price to reach $340 US in 2013. Current prices, which fluctuate with the season and with demand, are at $362 US, well above the average price forecast for 2013.

At current prices, Mohr states in the December edition of the monthly Scotiabank Commodity Price Index, mills have a 20 per cent profit margin over total costs, including depreciation. Further, the softwood lumber tax on U.S.-bound shipments is to drop from five per cent to zero in January, resulting in a further cash injection to mills' bottom lines.

She said the unseasonably high prices are a sign of two dynamics: A warmer than usual winter across much of the United States, which has prolonged the construction season, and the fact that wood products buyers, anticipating a winter construction slowdown, were caught with low inventory levels. The sentiment that prices were going to go lower has suddenly changed, she said, to a sentiment that they are going to go higher. Buyers are now stocking up, expecting higher prices in the future.

In Scotiabank's commodity price index, forest products were the best performing sector in November. The index baseline is 100 at January 2007. In November, lumber climbed to 120.7, up from 106.9 the previous November. Although it was the fastest-climbing commodity for the year, it is coming off from the lowest bottom. The index for all commodities in November is at 147.7, down from 161 the previous November.

Mohr said the index overall has dropped in October and November after coming off summer highs.

"Commodity prices have dropped 8.4 per cent year-over -year through November and are currently 16 per cent below the near-term peak in April 2011," she stated in the report.

On another note, Mohr said Canada's inability to ship oil to export markets is taking an enormous bite out of the Canadian economy. Alberta oil is selling at a discount of $21 US a barrel in the U.S. market, which adds up to a $9-billion hit this year to Canadian oil producers. The discount to offshore prices is even steeper, another $17 US a barrel. If Canada were selling into offshore markets, it would add another $17.5 billion to revenues, she said.

Mohr, who advocates greater pipeline access to U.S. and Asian markets, said the net result goes beyond oil producers and shareholders. Government resource revenues and taxes are affected, which has budgetary implications for provinces.

"It's important for people to remember the levels of these numbers when they say they don't want to build pipelines to the B.C. Coast."