After a rocky start, 2020 turned into the best year ever for the North American OSB industry.
OSB prices during the third and fourth quarters reached record levels and have continued increasing in the first few months of 2021. Publicly traded OSB companies reported to their investors that 2020 operating profit was 10 times higher than 2019 as they earned the highest dollar sales and profits in the industry’s 40-year history.
At the beginning of 2020, the widespread impact of the looming Covid-19 pandemic was not understood. OSB makers generally expected more housing construction compared to the previous year and to have a modestly better year after a difficult 2019. As 2020 progressed, the virus and other events challenged the North American OSB industry more than at any point in history.
Besides unexpectedly high building material demand during the pandemic, other notable events occurred such as temporary mill curtailments due to Covid-19 outbreaks, natural disasters across the west and south, turmoil in the Over-the-Road trucking industry and the bitter US presidential election.
Following interviews with North American industry participants, our broad conclusion is that 2020 turned out much better than initially feared. While the pandemic has not yet concluded as of this writing, high construction activity and high product prices mean high company profits should continue through 2021.
A PROMISING BEGINNING (JANUARY – FEBRUARY 2020)
By mid-year 2019, persistently low OSB prices had caused four producers to indefinitely idle production lines (two in western Canada and two in the southern US). However, January and February 2020 seemed promising for OSB makers in spite of initial reports of a novel respiratory disease in China. Growing construction activity in the second half of 2019 pointed to 1.35 to 1.40 million housing starts in 2020, the most activity since the Great Recession of 2008.
Near the spring start of the construction season, both builders and consumers felt confident. Low mortgage interest rates were still declining to a historical low near 3%. The combination of strong consumer confidence and low interest rates usually precede a good year for housing starts, home builders, and OSB producers.
The US government mortgage guarantor Freddie Mac reminded the nation in early March, that, “The US housing market is missing [a backlog of] 3.3 million homes”. Lawrence Yun, the chief economist for the National Association of Realtors, reported that “it’s been a decade [since the Great Recession] and we’re not back to normal in terms of home building”.
Labour shortages plus limited building site availability remained unresolved problems in some regions. Nevertheless, builders with access to sufficient land and labour felt optimistic about a solid 2020. The ‘Black Swan’ of the pandemic negated all of the planning.
PANDEMIC PANIC AND QUARANTINES (MARCH – APRIL 2020)
The proverbial wheels began to come off the wagon in the second half of March. Many state and local governments responded to the spreading Covid-19 outbreak by issuing stay-at-home orders. Financial markets fell from record highs, construction projects abruptly halted, and wood panel prices plummeted.
The forest products industry took solace from the US Department of Homeland Security’s recognition that the industry has an “essential critical infrastructure workforce”. Similarly, Public Safety Canada designated forestry products workers as “essential to preserving life, health, and basic societal functioning”. These declarations shielded the industry from stay-at-home mandates.
However, many mills voluntarily or involuntarily reduced production for weeks at a time. Some mills reduced production due to lack of customer demand. Several mills temporarily closed after employees contracted Covid-19 and the entire workforce had to quarantine for 14 days.
By the end of April, residential construction started to recover from the initial shock of the Covid-19 pandemic. Demand for and production of wood panels rose, with demand increasing more quickly than supply. Besides public health measures and testing, a key to uninterrupted operations became proactively cross-training employees for other positions in case of a co-worker absence.
HIGH DEMAND AND LIMITED SUPPLY CAUSE RECORD OSB PRICES (MAY 2020 – EARLY 2021)
Dr Robert Dietz, chief economist for the National Association of Home Builders, writes that pandemic fears have caused city-dwellers to increasingly move to the suburbs “due to concerns over residential density” and increased telecommuting means “employees who can telework permanently… can effectively choose to live anywhere in the US with a reliable internet connection”.
Besides construction, other factors amplified North American demand for OSB. Many homeowners accumulated extra cash because of government stimulus payments and reduced household spending on travel, medical visits, entertainment, and restaurant meals. Some of those savings were used for Do-It-Yourself home improvement projects.
Towards the middle of summer, supply was starting to catch up with demand. Sticker shock at lumber and wood panel prices as well as long lead times reportedly caused commercial and multi-unit residential developers to postpone projects. However, natural disasters caused OSB prices to keep rising to record highs.
2020 turned into the second most active hurricane season on record. Of 30 named storms, 12 made landfall in the continental US. Hurricanes that made landfall in regions with OSB mills include Isaias in North Carolina; Delta, Laura, and Zeta in Louisiana; and Sally in Alabama. Electrical supply interruptions and employees attending to family needs caused immediate production curtailments, while waterlogged forests restricted wood supply for several weeks thereafter.
The doubling or tripling of prices for wood construction materials has trickled down to housing prices nationwide as builders have increased prices to absorb the higher costs.
“The industry has faced two surges in lumber pricing in 2020, including one that persists here at the start of 2021,” said Dr Dietz.
“The gains are adding about US$16,000 to the price of a typical newly built home. Materials are also taking longer to arrive at construction sites.”
In spite of higher new house prices, consumers have not reduced the pace of new house purchases.
Strong building activity in the second half of the year made up for the second quarter slowdown. Total housing starts for 2020 equalled 1.40 million per the US Census Bureau, or within the range of what had been predicted prior to the pandemic.
Europe has the second most important OSB industry after North America. During the second half of 2020, North American prices significantly exceeded European prices and potentially provided arbitrage opportunities. However, relatively few imports arrived from Europe or elsewhere.
TRANSPORTATION CHALLENGES DURING 2020
Forest products move from rural factories to distant cities (such as from Canada to the southern half of the US) most often by 18-wheel semi-truck. Difficulties with obtaining transportation to move products from factory to customer complicated operations for producers and worsened the shortages felt by customers in the second half of 2020.
As closures prevented many businesses from operating in the second quarter and the economy fell by near double-digits, the need for freight transportation also declined. Thousands of Over-the-Road trucking companies permanently closed. Reduced availability of trucks significantly impacted operations in the second half of the year.
When housing construction rebounded around the middle of the year and building materials producers ramped up production, the earlier downsizing of the trucking industry caused difficulties in timely moving product from mill to customer. OSB makers reported delays of up to two or three weeks in transporting merchandise to customers. Desperate customers readily paid higher trucking rates, but shortages exacerbated by the transportation constraint caused OSB prices to climb.
2020: RECORD PROFITS FOR OSB MAKERS
The three publicly-traded OSB producers (collectively with almost 60% of North American production capacity) reported record profits. Profitability as measured by EBITDA increased by more than 1,000% for 2020 compared to 2019. Norbord (now owned by West Fraser), the largest OSB maker in North America, disclosed that North American sales (in US dollars) increased by 56% in spite of sales volume decreasing by 6%. Key input costs (labour, wood fibre, adhesives, energy) did not greatly change, so virtually all of the windfall revenue flowed through to operating profit. Louisiana Pacific (the #2 maker) and Weyerhaeuser (the #4 maker) also achieved record OSB segment results during 2020.
WEST FRASER / NORBORD MERGER AND LIMITED MILL RE-OPENINGS
The most significant industry happening was West Fraser’s February 1, 2021 merger with Norbord. West Fraser’s shareholders own the majority of the new company. West Fraser is the largest lumber producer in North America, and in recent years has reduced its reliance on western Canada by purchasing dozens of sawmills in the south-eastern US. Most of Norbord’s mills are in the US or eastern Canada, and the acquisition makes West Fraser the largest OSB producer in North America.
Two of the four closing in 2019 are in the process of reopening. First, Norbord reopened the Cordele, Georgia OSB line in autumn 2020. Second, Louisiana Pacific announced the third quarter 2021 reopening of its Fort St Johns, British Columbia location.
Norbord also announced the spring 2021 reopening of the closed Chambord, Quebec mill that it had bought from Louisiana Pacific in 2016. The company has an agreement with the Province of Quebec to supply most of Chambord’s wood fibre needs.
West Fraser and Louisiana Pacific have made announcements regarding OSB capacity reductions. First, West Fraser announced the liquidation of the 100 Mile House, British Columbia mill that was mothballed in 2019. The company now believes that it can never reliably access enough wood fibre to operate this mill. Second, Louisiana Pacific intends to convert its Sagola, Michigan structural OSB mill to siding production in 2022.
EXPECTATIONS FOR A SUCCESSFUL 2021
The late arrival of winter to the southern US caused strong demand for building materials to continue into the new year. Construction did not slow down until the arrival of severe weather in February 2021. With the spring 2021 building season not far away, inventory remains low. OSB prices have remained at historic highs up to March 2021.
The median housing start forecast of 1.47 million units for 2021 reflects that mortgage interest rates remain low and many urban office workers intend to telecommute from less densely populated areas. Given strong demand and constrained supply, North American OSB prices should remain high. With stable production costs, 2021 is also likely to be lucrative for OSB makers.
2020 stands out because of its uniqueness in the 40 or so years since the initial commercialisation of OSB. However, the pattern of the forest products industry has been a boom-and-bust cycle in which lack of capacity discipline eventually causes market prices to crash. Looking a few years into the future, we will see if OSB makers have broken the cycle or if they will imprudently invest in new production facilities.
