Outlook for North American Structural Panels

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


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


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

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North American structural panel demand


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


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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


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%


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%


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


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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


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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Residential Industrial Repairs & remodeling

Nonresidential Offshore exports


North American structural panel supply


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.


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


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%


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.

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71%

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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


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


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.


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


North American costs and profitability


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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USA Canada


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.


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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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OSB discount to plywood (%) Average, 2000-2009


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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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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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


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


Outlook for North American Structural Panels

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