Unexpectedly low construction activity during 2019 caused weak demand and prices for OSB, and the industry suffered.
By the end of 2019, four companies had reacted by closing almost as much manufacturing capacity as the industry had opened in 2017 and 2018. Between lower supply and expectations for greater demand, industry insiders now have increasing confidence that usage will come closer to matching production capacity in 2020 and 2021.
The big proviso with this relates to the onset of the coronavirus outbreak, which was just starting to hit as this report was filed.
Flat Housing Starts
The ‘American Dream’ includes a large single-family home in the suburbs. This dream house commonly is a light wood frame structure that uses dimension lumber for the frame and structural panels for wall sheathing, subflooring, and subroofing.
For 60 years from the late 1940s to the recession of 2008, US housing starts averaged about 1.55 million per year.
Starts occasionally exceeded 2 million in good years and sometimes fell toward 1 million in bad years. However, housing production reliably fluctuated around this six-decade average.
After bottoming out at about 600,000 housing units per year in 2009, 2010, and 2011, construction activity has never recovered to the pre-recession average. Housing starts reached 1.21 million units in 2017, 1.25 million in 2018, and 1.30 million in 2019.
Compounding decreased US residential construction over the past decade is the evolved nature of housing. After the recession, a higher proportion of residential construction is for multi-family units. A multi-family unit consumes about one-third to one-half the building materials of a singlefamily house because it’s smaller and shares elements with other units.
The growing US population requires additional housing. When discussing his February 2020 report The Housing Supply Shortage: State of the States, Sam Khater, the chief economist of US government mortgage lender Freddie Mac, stated, “…We expect home purchase demand will remain strong well into the next decade as the peak cohorts of millennials turn 30 years of age in 2020 and beyond… Simply put, new housing supply is not keeping up with rising demand. We estimate that the housing market is under-supplied by 3.3 million units, and the shortage is rising by about 300,000 units per year.”
In spite of nominally low interest rates, high credit standards and substantial student loan debt prevent young families from qualifying for a mortgage. Other recent impediments to home construction around large urban centres are rising land prices and increasing bureaucratic procedures.
2019 Production Declined
North American OSB production during 2019 mirrored mediocre product demand. Per APA – The Engineered Wood Association, total production fell to 20.3 million m3 in 2019 from 20.8 million m3 in 2018. The production decline accelerated over the year as producers reacted to mediocre housing starts by closing mills.
The US south is the leading region for OSB production in North America. In spite of the overall decline, during 2019 mills in the southern US collectively grew OSB production by 1.6%. Three of the five mills that opened in 2017 and 2018 are in the US south, and increased regional production reflects the maturing of the mills. 2020 production statistics from the US south are likely to reflect curtailments that occurred towards the end of 2019.
Canada is the second most important region for OSB production.
Overall Canadian production fell by more than 9% compared to 2018. However, the decline accelerated from 2% in the first half of 2019 to 19% in the second half of the year as two mill curtailments in British Columbia removed productive capacity from the market.
Consistently Low Prices
The trade newsletter Random Lengths reports commodity OSB market prices every week as the accepted source in North America. Their data indicates that volatility, as measured by the difference between the highest and lowest prices within a calendar year, was the third lowest in 2019 since they started compiling OSB prices. Unfortunately, prices were stable at a low level.
The wholesale price for a standard south-eastern US 15/32in (approximately 12mm) OSB panel hit bottom at US$148/ m3 in October 2019, while the yearly high of US$208/m3 happened a few weeks later in November. December 2019 ended at US$186/m3.
RISI statistics indicates that the variable cost of production for less efficient mills was higher than 2019 product prices.
“Pricing was depressed because the demand/capacity ratio got out of balance due to the number of new plants coming online in 2018,” said Craig Miles, business marketing manager for OSB and engineered wood products at Louisiana Pacific. “Frankly, the industry predicted higher demand and increased capacity accordingly. The capacity levels exceeded the actual market demand and resulted in pricing drops.”
Curtailments across North America
In response to low prices, several plants permanently curtailed operations during 2019. And, in addition to the closures, several mills took extended shutdowns or reduced shifts during 2019.
In June 2019, Norbord announced the closure of its mill in 100 Mile House, British Columbia and Louisiana Pacific separately decided to shut down its Fort St John, British Columbia mill. Besides weak product markets and high prices for log exports to Asia, the realisation that timber supply in western Canada will permanently decline due to widespread mountain pine beetle infestations has prompted forest products producers to reconsider their British Columbia operations.
In October 2019, Norbord announced the end of production on one of two lines at Allendale, South Carolina. Georgia Pacific separately decided to curtail its Cordele, Georgia mill.
All announced mills ceased production before the end of 2019. Each closure was described as a curtailment in which the machinery will be maintained and could potentially restart once the market improves. The closures collectively removed 2.3 million m3 of productive capacity from the market.
Two greenfield mills (Forex Amos in Quebec and Martco in Texas) and three previously curtailed mills in Alberta, Alabama, and Tennessee had commenced production in 2017 and 2018. The greenfield mills each installed an efficient Dieffenbacher multi-opening hot press. The annual cumulative productive capacity of these five mills exceeds 2.5 million m3.
Projected market demand when planning these five new mills several years ago was meaningfully better than realised demand in 2019 and currently expected demand for 2020 and 2021. The 2019 mill closures removed almost as much capacity as was added in 2017 and 2018.
“We feel that the demand capacity (DC) ratios are in better balance today than at the end of 2018,” added Mr Miles. “The industry appears to be demonstrating greater discipline around maintaining a healthy DC ratio…”
New Uses and Markets For OSB
Ever since Louisiana Pacific first popularised OSB as a commercial product 40 years ago, OSB volume has largely grown by substituting for structural plywood as wall sheathing, subflooring, and subroofing in residential and commercial construction.
There are more than 100 OSB and plywood mills in North America, as well as significant plywood imports from Brazil and Chile, that make US Department of Commerce voluntary product standard VPS-2 compliant structural panels that meet US building codes. Construction-grade OSB has become a commodity sold on the basis of lowest price.
To escape the intense competition, producers are developing specialty panels that solve specific construction and non-construction problems. The intent is to encourage purchasers to choose OSB for reasons other than low price.
A problem that OSB makers are helping builders to overcome is declining labour availability. For example, Huber has developed its ‘ZIP’ system of OSB sheathing for roofs and walls, with a distinctive forest green coloured moisture barrier applied at the factory and distinctive black joint-sealing tape for the job site.
The ZIP system avoids the need for additional labour to separately affix polyethylene house-wrap as the moisture barrier. Other producers have created products that resemble the ZIP system. Norbord and others highlight their panels that are larger than the standard panel size of 4ft (1.21 m) by 8ft (2.43 m). Larger panels require less job site labour to cut to size. Other innovations that economise construction labour are OSB panels made in radiant barrier overlay, fire-rated, and insulated versions. All of these specialised panels command higher prices than commodity OSB.
Many plywood survivors have stayed in business by offering specialised panels for non-construction applications such as furniture parts, concrete forming, and underlayment.
“OSB is viable in any application that can utilise a rectangular structural member,” said Mr Miles. “Consequently, the nonconstruction applications of plywood are also viable for OSB in the future, and I think that the potential is very positive.” While there are technical challenges – such as OSB more readily absorbs moisture than plywood – OSB is increasingly marketed as a substitute for plywood in industrial applications.
Current uses include furniture components and underlayment. Timber Products Company, a maker of hardwood plywood, has developed its ‘SpecialT’ decorative panel with high-value veneers like cherry and walnut for the faces and lower-cost OSB for the substrate.
Litigation over Intellectual Property
The ‘ZIP’ panel system with a built-in moisture barrier commands a price premium relative to commodity OSB. Huber has received several US patents that protect its investment in research and development of the ‘ZIP’ system.
In December 2018, Huber initiated civil proceedings against Martco, shortly after Martco launched its ‘Eclipse WRB’ OSB panel with a built-in moisture barrier. In February 2019, Huber filed a civil complaint against Louisiana Pacific shortly after the latter introduced its ‘WeatherLogic’ OSB panel with a built-in moisture barrier. In both cases, Huber has alleged that other OSB panels with built-in moisture barriers infringe on its patents for this product class.
Huber and Martco settled in July 2019. Per the settlement, Martco agreed to stop the sale of its Eclipse WRB panel.
However, the litigation between Huber and Louisiana Pacific continues as of this writing. Louisiana Pacific argues that Huber’s patents were improperly issued and are invalid. The trial is currently scheduled for September 2021.
Expectations for 2020, 2021, and Beyond
OSB prices in the first two months of 2020 have improved compared to 2019. The 2019 closures reduced supply and a mild winter has allowed more construction activity than usual. The price for south eastern US 15/32in OSB at the end of February 2019 was US$288/m3 (a 55% increase in two months).
The “expert” consensus for US housing starts in 2020 clusters more or less around 1.3 million. For example, the US government mortgage lender Fannie Mae projects 1.35 million, the structural panel trade association APA – The Engineered Wood Association predicts 1.34 million, the National Association of Home Builders forecasts 1.3 million, and the large private mortgage lender Wells Fargo expects 1.33 million. “The ‘new normal’ [for US housing starts] seems to be around 1.25 million housing starts,” said Mr Miles.
Canadian housing starts historically have averaged about 200,000 per year and are less volatile than US housing starts. The Canada Mortgage and Housing Corporation expects a normal level of housing starts in 2020.
Eventually US housing starts should recover to the historically normal level and North American producers will find value added usages of OSB.
However, in 2020 and 2021 housing demand relative to structural panel supply will remain the key variable in industry performance. In other words, near-term prices will parallel residential construction trends.
