outlook for north american structural panels
TRANSCRIPT
Outlook for North American Structural Panels
North American Conference
October 2020
Jennifer Coskren
Senior Economist, Wood Products
2020 | Fastmarkets | Outlook for North American Structural Panels 1
Agenda
Structural panels outlook
• Current market conditions
• North American structural panel demand
Strength of US housing will determine how well panel demand grows in the next two years
• North American structural panel supply
North American OSB capacity became constrained (again) as COVID-19-induced
shutdowns underestimated demand
Exposure to offshore markets, but mostly on the plywood side
• Outlook for costs and profitability
2020 | Fastmarkets | Outlook for North American Structural Panels 2
Improving markets and increased volatility
Recovery in housing is key
• Recovery in US housing surprised in 2020
Renovation spending/DIY also proving to be a stellar source of demand
Both plywood and OSB demand increased in 2019 but at a slower rate
OSB will remain the dominant player in the panel market
• Demand is currently outpacing supply
Plywood producers remain disciplined
In 2019, OSB production outpaced demand and pricing was weak
But in 2020, product prices are at their highest levels on record as demand once again
outstripped supply
• Prices trended upward with heightened volatility
Excess supply response could result in increased volatility
2020 | Fastmarkets | Outlook for North American Structural Panels 3
Near term: Supply rose considerably in 2019 but inventories tightening again in 2020US OSB inventory as a share of demand
INVENTORIES LOOSENED IN 2018
From 2015-2017, dealer inventories were quite
lean
• This led to strong pricing power and a
market prone to price spikes even after mild
supply disruptions
• Inventories loosened considerably in 2018
after housing slowed in the second half of
the year
• This resulted in much weaker pricing levels
in 2019
• But inventories are once again tightening as
demand surprised to the upside
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42020 | Fastmarkets | Outlook for North American Structural Panels
Near term: Structural panel prices at record levels
this summerRandom Lengths Structural Panel Composite Price
52020 | Fastmarkets | Outlook for North American Structural Panels
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North American structural panel demand
2020 | Fastmarkets | Outlook for North American Structural Panels 6
Slow recovery in housing is mirrored in North American structural panel demandDemand by end use, BSF, 3/8-inch basis
STRUCTURAL PANEL DEMAND
BY END USE
We have seen a recovery in structural
panel demand, with residential
construction accounting for the majority
of growth
• Demand will reach a 17-year high in
2022
• Demand growth, however, will be
relatively modest as housing starts
grow slowly
72020 | Fastmarkets | Outlook for North American Structural Panels
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Residential Industrial
Repairs & remodeling Nonresidential
Offshore exports US housing starts (R)
Other end-use markets important, but residential construction will remain keyNorth American STP other end-use consumption, BSF, 3/8-inch
OTHER END-USE MARKETS
WILL ALSO PERFORM WELL
Aside from new housing the biggest
contributor to STP demand will be
residential repair and remodeling.
• The unexpected strength in 2020
repair and remodeling will lead to
somewhat slower growth in 2021
• Growth in industrial markets will be
fairly balanced between plywood and
OSB
• Growth will also continue for
nonresidential construction but that
will remain a marginal source for
wood products demand.
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Industrial Repairs & remodeling Nonresidential
82020 | Fastmarkets | Outlook for North American Structural Panels
Increased exposure to residential construction drives osb demand 2019 North American demand by end use, BSF, 3/8-inch basis
OSB AND PLYWOOD ARE VERY
DIFFERENT WHEN IT COMES TO
DEMAND GROWTH
Over 50% of OSB demand emanates
from new housing construction
• The strength in OSB demand is
going to rely heavily on new housing
starts
• Traditionally, the largest plywood
end-use market has been industrial
• But R&R has been gaining share
and is now evenly divided with
industrial
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OSB PlywoodResidential Industrial
Repairs & remodeling Nonresidential
Offshore exports
53%
92020 | Fastmarkets | Outlook for North American Structural Panels
Structural panel growth will be steady through 2022, although OSB will grow a bit fasterSLIGHTLY FASTER GROWTH EXPECTED FOR OSB COMPARED TO PLYWOOD
The forecast is calling for more tempered growth for plywood than for OSB. This faster growth for OSB
will stem from its reliance on housing as the primary driver of growth.
REAL ECONOMIC ACTIVITY 2020 2022 % CHANGE
Residential construction
(billion sq. ft. floor space)2.69 2.83 7.4%
Residential repair and remodeling
(billion 2005$)134.7 143.6 6.6%
Industrial production
(2007=1.0) 1.05 1.06 1.0%
Nonresidential construction
(billion 2005$) 173.3 188.1 8.5%
Structural panel demand (BSF) 33.2 35.4 6.7%
Plywood 10.8 11.4 5.0%
OSB 22.4 24.0 7.2%
2020 | Fastmarkets | Outlook for North American Structural Panels 10
OSB dependence on residential construction yields higher growth Year-over-year percentage change in North American OSB and plywood demand
OSB’S SHARE OF STRUCTURAL
PANELS WILL GROW THROUGH
2022
North American OSB will follow US
housing starts upward.
• OSB’s share will grow from a low of
57% in 2009 to 67% by 2022.
• Plywood essentially will be flat through
2021 and its share will decline.
• OSB will be growing that much faster
than plywood, thanks to its larger
reliance on housing
112020 | Fastmarkets | Outlook for North American Structural Panels
40%
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65%
70%
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OSB Plywood OSB Share (R)
OSB is approaching high penetration in several US end-use marketsOSB share (%)
OSB MARKET PENETRATION HITTING HIGH LEVELS
In terms of market penetration in the wood products end-use markets, OSB has grown dramatically in the
last decade. At least on the residential side, we are likely hitting very close to the maximum share that
OSB can take from plywood.
END-USE MARKET 2011 2019
Residential 79 81
Single-family 79 81
Multifamily 74 81
Repair and remodeling 55 60
Nonresidential 27 35
Industrial 55 58
2020 | Fastmarkets | Outlook for North American Structural Panels 12
Secular decline in plywood usage rates have ended and demand is stable but lowNorth American plywood demand by end use, BSF, 3/8-inch basis
GIVEN HIGH OSB
PENETRATION, SECULAR
DECLINE IN PLYWOOD DEMAND
HAS ENDED
OSB’s share of demand will grow
thanks to housing, but no more
significant inroads by OSB into the
structural panel end-use markets are
expected.
• This would require improved board
and laminate performance
• All of the easy markets that OSB can
capture with its competitive prices
have already been taken0
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80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22
Residential Industrial Repairs & remodeling
Nonresidential Offshore exports
132020 | Fastmarkets | Outlook for North American Structural Panels
North American structural panel supply
2020 | Fastmarkets | Outlook for North American Structural Panels 14
OSB operating capacity remains constrained in the near termNorth American capacity at year-end, MMSF, 3/8-inch basis
MARKETS LOOSENED IN 2018
WITH NEW CAPACITY
The market grew tighter and D/C ratios
moved up in 2017 to their highest levels
since 2006.
• However, markets loosened
considerably in 2018 after housing
slowed and new capacity was added
• Two closures in BC lowered Canadian
capacity in late 2019
• Markets are tightening again in 2020
as capacity was cut in what was
expected to be a weaker demand
environment
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Operating capacity (L) NA OSB demand
OSB supply expanded
Additional OSB supply comes from three main sources
Restarted or upgraded existing capacity
• Due to weak pricing in 2019, the market only saw closures
o Two mills in Western Canada shuttered in 2019, almost 2.0 BSF in total
• Second Norbord Cordele line restarted in 2020
Potential for new capacity is high with current pricing
• Pricing is at highest levels on record
• Martco opened the Corrigan, Texas, mill in 2018
No other greenfield mills are expected before the end of 2021
Offshore imports
While offshore imports will likely increase, even at the cyclical peak in 2005 they
only accounted for 3.0% of demand. They will remain a marginal source of
supply.
2020 | Fastmarkets | Outlook for North American Structural Panels 16
OSB capacity restarted in 2018 but other capacity was shuttered in 2019Capacity, MMSF, 3/8-inch basis
LOCATION/NAME OWNERSHIPCAPACITY
MMSF
YEAR
RESTARTED
Huguley, Alabama Norbord 500 2017/2018
High Prairie, Alberta Tolko 650 2018
Spring City, Tennessee Huber 450 2018
Amos, Quebec Forex 350 2018
Corrigan TX Martco 750 2018
2020 | Fastmarkets | Outlook for North American Structural Panels 17
Mill restarts/new capacity in 2018
LOCATION/NAME OWNERSHIPCAPACITY
MMSF
YEAR
CLOSED
Cook, Minnesota Louisiana-Pacific 440 2008
Chambord, Quebec Norbord 470 2008
Val D’Or, Quebec Louisiana-Pacific 340 2013
Peace Valley, BC Louisiana-Pacific 800 2019
100 Mile House BC Norbord 440 2019
Allendale Georgia-Pacific 900 2019
Idle mills/closures as of 2019
OSB operating capacity gains concentrated in the US SouthShare of additional capacity gains by region, 2018-2019, percent
LOW FIBER COSTS MAKE THE
SOUTH THE DESTINATION FOR
CAPACITY EXPANSION
US South, 59%
North Central, 3%
Eastern Canada, 15%
Western Canada, 24%
182020 | Fastmarkets | Outlook for North American Structural Panels
OSB operating capacity is quite concentratedLargest producers’ share of total operating capacity
MILL CLOSURES IN 2019
MADE THE OSB MARKET
SLIGHTLY LESS
CONCENTRATED
The top five producers now control
about 80% of operating capacity.
• The potential for overproduction
in OSB capacity still persists,
even with the more concentrated
market.
80%
20%
2019
192020 | Fastmarkets | Outlook for North American Structural Panels
71%
29%
2011
TOP 5 PRODUCERS
OTHER
No additional capacity expected in the near term for plywoodNorth American plywood capacity, 3/8-inch basis, BSF
PLYWOOD SUPPLY IS A VERY
DIFFERENT STORY FROM OSB
Idle plywood capacity ownership
remains fairly concentrated, though it
became a bit less so in recent years.
We estimate that nearly 70% of idle
capacity is in the hands of Georgia-
Pacific.
• No additional capacity since 2015
• Georgia-Pacific closed its Warm
Springs, GA, plywood mill in 2018
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Operating capacity
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Plywood more exposed to offshore imports than OSBNorth American offshore imports, 3/8-inch basis, BSF
OFFSHORE IMPORTS OF
PLYWOOD SURGED IN RECENT
YEARS
Offshore imports accounted for nearly
20% of demand in 2018, a record high.
• Most of the imports are coming from
Brazil
• But China’s share grew dramatically
in 2017 and 2018
• Imports from China trailed off in
2019
• Despite record plywood pricing this
year, offshore imports are down 10%
through July 2020
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Percentage of demand supplied by imports
Plywood OSB
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US and Canadian plywood imports, July 2020Offshore imports YTD, 3/8-inch basis, MMSF
THE TOP THREE EXPORTERS TO NORTH AMERICA ARE BRAZIL, CHILE AND CHINA
One of the main sources of imports has been Brazil, which should see continued strength in exports to the
US and Canada as long as both prices and exchange rates remain favorable.
COUNTRY 2019 2020 YTD 2019 YTD % CHANGE
Brazil 895.1 442.1 527.0 -16%
Chile 490.2 286.2 292.1 -2%
China 266.2 145.5 175.3 -16%
Uruguay 72.6 47.8 30.7 56%
Malaysia 7.1 4.6 4.1 12%
Other 26.7 14.3 16.3 -12%
Total 1,757.9 941.5 1,045.6 -10%
Source: GTA.
2020 | Fastmarkets | Outlook for North American Structural Panels 22
Structural panel D/C ratios: Tight markets through 2022North American structural panel demand/capacity (%)
DEMAND/CAPACITY RATIOS
TIGHTENED IN 2019
After reaching their highest levels
since in over a decade in 2017, OSB
D/C ratios retreated in 2018.
• Markets have tightened
considerably since as capacity has
been taken out of the market
• Plywood D/C ratios eased in 2018
along with the surge in offshore
supply and weaker demand
• OSB markets have tightened in
2020 and will remain relatively tight
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OSB D/C Plywood D/C
232020 | Fastmarkets | Outlook for North American Structural Panels
North American costs and profitability
2020 | Fastmarkets | Outlook for North American Structural Panels 24
Weaker Canadian dollar has helped Canadian producersOSB variable production costs by region, US dollars per MSF, 3/8-inch basis
THE LOWER VALUE OF THE
CANADIAN DOLLAR PUSHED
COSTS DOWN
The depreciation of the Canadian dollar
benefited Canadian OSB producers
significantly.
• Between 2012 and 2019, we
estimate average weighted costs for
the US dropped 3% while costs in
Canada dropped by 24%
• We should see a continuation of the
favorable exchange rate
environment for Canada through
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252020 | Fastmarkets | Outlook for North American Structural Panels
Rising wood costs in the US West driving variable costs for plywood higherPlywood variable production costs by region, US dollars per MSF, 3/8-inch basis
MARGINS BETWEEN WOOD
COSTS IN THE US WEST AND
THE US SOUTH EASED
SOMEWHAT IN 2019
• Wood costs in the US West will likely
remain elevated due to the
disaggregated ownership of timber,
excess supply in the US South and a
stronger domestic market.
• The ratio of wood costs in the US
West to the US South will average
2.1 between 2020 and 2022, well
above the average of 1.25 in the last
decade.
262020 | Fastmarkets | Outlook for North American Structural Panels
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US South US West Western wood costs/Southern wood costs (R)
Weaker OSB pricing has led to high OSB discounts to plywoodOSB discounts to plywood (%)
PLYWOOD PRICES HAVE BEEN
LESS VOLATILE THAN OSB
The OSB discount to plywood reached
high levels in 2018 and 2019.
• This discount rose in 2018 and early
2019 as the OSB market tried to
absorb the restarts just as housing
demand eased.
• The discount rapidly fell as higher
OSB demand and lean OSB
inventories lifted prices. In the first
quarter of 2020, the discount dipped
to 31%, close to its historical
average.-10%
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272020 | Fastmarkets | Outlook for North American Structural Panels
OSB profitability reaching strong levels after record pricing levels
PROFITABILITY REACHING
RECORD LEVELS WITH
CURRENT PRICING
In the second quarter of 2018, OSB
profitability in the US South was at its
highest levels since 2005.
• Profitability eroded in the second half
of 2018 as prices declined.
• OSB profitability was at record levels
in the third quarter of 2020 thanks to
extraordinary pricing levels.
• We expect prices and profitability to
fall in the fourth quarter along with
seasonally slower demand.
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US South Western Canada
282020 | Fastmarkets | Outlook for North American Structural Panels
Plywood profitability saw a larger regional spreadMill realization/total production costs
STRONG REGIONAL SPREAD IN
PLYWOOD PROFITABILITY
Profitability rose rapidly in both the US
West and the US South thanks to the
very strong pricing environment in early
2018.
• But profitability eroded in 2019 as
plywood prices fell dramatically
• The declines were more pronounced
in the US West thanks to the higher
stumpage prices.
• Profitability in the US South has hit
very high levels in 2020, but has
risen less in the US West.
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292020 | Fastmarkets | Outlook for North American Structural Panels
Risks
Demand
• The housing recovery stalls and fails to accelerate in 2021
Supply
• With OSB prices so high, capacity could be added more quickly than
market may be able to absorb
• Imports could grow more quickly
Prices
• Same as always: Lots of risk
2020 | Fastmarkets | Outlook for North American Structural Panels 30
Conclusions
Recovery in US housing is key to forecast
• Other end-use markets growing but at a subdued rate
• Both plywood and OSB demand will increase
o OSB will grow more quickly than plywood
Supply is under strain in 2020
• OSB production undersupplying the market
• Plywood producers remain disciplined, although import levels could
increase with the strong pricing
• Production on the plywood side will lag relative to OSB
Prices will trend lower amid heightened volatility for OSB
2020 | Fastmarkets | Outlook for North American Structural Panels 31