the timber network

Contrary to the lacklustre MDF and plywood markets, OSB continues to be a hot product in North America, according to International Wood Markets (IWM). OSB producers benefited from the stellar North American housing demand, a high-cost competing product (plywood) and an ongoing shortage in panel supply. Strong demand and short supply led to record high prices for OSB. Since mid-2003, OSB prices have exceeded $250 per msf (thousand square feet), peaking at over $500 in April 2004 and trading between $250 and $390 since then. In contrast, between 1996 and mid-1998 and for most of 2001 and 2002, OSB prices rarely went over $200 per msf.

In conjunction with the rising prices, OSB mills enjoy exceptionally high earnings and very liquid cash positions. On average for the last three years, the dominant producers’ financial statements show earnings before interest, tax and depreciation allowance (EBITAD) of approximately $120 per msf, representing an EBITAD margin on sales of about 35%. This constitutes a payback period of less than three years on a modern mill.

To grow business further, most of the leading OSB players have announced new greenfield plants or expansions of existing plants. Growth by way of acquisitions is less feasible. The few firms that could potentially be for sale have a very high “sticker” price. Already in 2005, two new mills (Canfor/L-P and Georgia Pacific) were built, plus a few smaller expansions, for a total increase in capacity of almost 1.5 billion sf. Two more mills (Norbord and Marco) will start-up later in 2006 while seven new plants will add a whopping 4.6 billion sf of OSB supply in 2007. IWM forecasts that the total capacity expansion between 2006 and 2010 may be as high as 8.7 billion sf.



However, the current downturn in the housing demand will probably lead to an excessive supply of OSB toward the end of this year and this may further aggravate in 2007. The continued retrenchment of plywood capacity will mitigate this situation only moderately. Under this scenario, it is likely that several of the announced OSB expansion projects will be delayed or cancelled. Due to the build-up of excessive supplies, OSB prices will undoubtedly become softer in the years to come. While OSB prices in 2006 will likely remain above the $260 per msf level, the forecast for 2007 is more pessimistic at about $200. The declining prices will coincide with the threat of higher energy, resin and fibre costs, thereby squeezing the mills’ profitability.

In order to reduce its reliance on commodity-like structural panels for the housing industry, many OSB producers are directing some of the new and existing capacity away from the crowded market of basic sheathing panels towards more innovative specialty products with higher profit margins. Examples include siding products, Oriented Strand Lumber (OSL), flooring panels, rim boards, moisture-resistant panels and similar products.