RISI Wood & Timber · Tale of Two Markets: Different Growth Outlook for US Plywood and OSB Demand...

© Copyright 2018 RISI, Inc. | Proprietary Information

RISI Wood & TimberStructural Panel Outlook

Jennifer CoskrenSenior Economist, Wood and Timber

North American ConferenceOctober 2018

Agenda

• Review 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 supply loosened in 2018 as additional capacity was added, including the new OSB mill in Corrigan, Texas

What we can expect for restarts in 2019 and 2020 Exposure to offshore markets, but mostly on the plywood side

• Outlook for costs and profitability

© Copyright 2018 RISI, Inc. | Proprietary Information 2

• Recovery in US housing has accelerated a bit in 2018 Other end‐use markets growing, particularly the R&R market Both plywood and OSB demand will increase OSB will remain the dominant player in the panel market

• Supply has begun to expand to meet growing demand but how fast will determine market stability and tightness Plywood producers remain disciplined In 2017, OSB production converged with demand and pricing was strong How well the OSB market weathers the restarts will depend on housing

• Prices trended upward with heightened volatility Seasonality and supply response will result in increased volatility

Overview: Improving Markets and Increased Volatility


Near Term: Conservative OSB Buying in 2017, as Supply Rose in Early 2018US OSB Inventory Estimate, Months of Supply

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018


Consumption Will Move Higher with Housing

North American Demand


US Housing Will Drive North American Structural Panel Demand HigherDemand by End Use, BSF, 3/8‐inch Basis

0.0

0.5

1.0

1.5

2.0

2.5

0

10

20

30

40

50

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20Residential Industrial Repairs & RemodelingNon Residential Offshore Exports US Housing Starts (R)


Other End‐Use Markets to Grow, But Not as Quickly as ResidentialNorth American STP Other End‐Use Consumption, BSF, 3/8‐inch

0

2

4

6

8

10

2012 2013 2014 2015 2016 2017 2018 2019 2020

Industrial Repairs & Remodeling Non Residential


Increased Exposure to Residential Construction Drives OSB Demand 2017 North American Demand by End Use, BSF, 3/8‐inch Basis

32%

0

5

10

15

20

25

OSB Plywood

Offshore ExportsNonresidentialRepairs & RemodelingIndustrialResidential

53%


Tale of Two Markets: Different Growth Outlook for US Plywood and OSB Demand

2018 2020 % Change

Real Economic Activity

Residential Construction (Billion sq. ft. floor space) 2.79 3.58 19.6%

Residential Repair and Remodeling (Billion 2005$) 157.3 171.0 8.7%

Industrial Production (2007=1.0) 1.03 1.07 4.4%

Nonresidential Construction (Billion 2005$) 205.3 234.3 14.1%

Structural Panel Demand (BSF) 32.8 36.6 11.6%

Plywood 11.1 11.6 4.7%

OSB 21.8 25.0 15.1%


OSB Dependence on Residential Construction Yields Higher Growth Year‐over‐Year Percentage Change in North American OSB and Plywood Demand

‐3%

‐1%

1%

3%

5%

7%

9%

11%

12 13 14 15 16 17 18 19 20

OSB Demand GrowthPlywood Demand Growth


OSB’s Share Will Increase Due to Exposure to Residential ConstructionNorth American Structural Panel Demand, BSF, 3/8‐inch Basis

45%

50%

55%

60%

65%

70%

05

101520253035404550

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

PlywoodOSBOSB Share (R)


OSB Is Approaching High Penetration in Several US End‐Use Markets

End Use Market 2011 2017

Residential 79 81

Single Family 79 81

Multifamily 74 81

Repair and Remodeling 55 60

Nonresidential 27 35

Industrial 55 58

OSB Shares (%)


Secular Decline in Plywood Demand Has Ended and Growth Is Slowly ResumingNorth American Plywood Demand by End Use, BSF, 3/8‐Inch Basis

0

5

10

15

20

25

30

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20

Residential Industrial Repairs & Remodeling Nonresidential Offshore Exports


OSB Market Experiences Further Restarts

North American Supply


OSB Operating Capacity Will Increase, but So Too Will DemandNorth American Capacity at Year End, MMSF, 3/8‐Inch Basis

10

12

14

16

18

20

22

24

26

28

0

5

10

15

20

25

30

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Operating Capacity (L) NA OSB Demand


Additional OSB Supply Comes from Three Main Sources• Restarted Capacity

Nearly 3.0 BSF of capacity could be restarted between 2018 and 2020 Additional restarts will mostly come in US South and Eastern Canada

• Norbord restarted Huguley in late 2017 and has expressed interest in Chambord site

• Potential for Capacity Expansion Martco opened the Corrigan, Texas, mill in 2018 No other greenfield mills are expected before the end of 2020

• Offshore Imports A strong demand and pricing environment attracts offshore producers 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.


Restarted OSB Capacity in 2018 and BeyondCapacity, MMSF, 3/8‐Inch Basis

Location/Name Ownership Capacity (MMSF)

Restart Year

Huguley, Alabama Norbord 500 2017/2018

High Prairie, Alberta Tolko 650 2018

Spring City, Tennessee Huber 450 2018

Chambord, Quebec Norbord 550 2019/2020

Val D’Or, Quebec Louisiana‐Pacific 340 2022

Cook, Minnesota Louisiana‐Pacific 440 2022


OSB Operating Capacity Has Become More ConcentratedLargest Producers’ Share of Total Operating Capacity

2011

Top 5 Producers Other

2017


No Additional Capacity Expected in the Near Term for PlywoodNorth American Plywood Capacity, 3/8‐Inch Basis, BSF

0

5

10

15

20

25

2006 2017

Operating Capacity


Plywood More Exposed to Offshore Imports than OSBNorth American Offshore Imports, 3/8‐Inch Basis, BSF

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

Percentage of Demand, Plywood

Percentage of Demand, OSB


US and Canadian Plywood Imports, July 2018Offshore Imports YTD, 3/8‐Inch Basis, MMSF

2017 Total 2018 YTD 2017 YTD % Change

Brazil 728.5 566.3 413.7 37%Chile 315.8 312.1 239.7 30%China 309.1 577.6 70.6 718%Uruguay 53.4 27.4 28.0 -2%Malaysia 1.2 1.22 1.16 5%Other 127.9 8.3 12.2 -32%Total 1,535.8 1,492.8 765.5 95%


Structural Panel D/C Ratios: Tighter by 2019North American Structural Panel Demand/Capacity (%)

0%10%20%30%40%50%60%70%80%90%

100%

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

OSB D/C Plywood D/C


Outlook for Prices and Profitability

Price Volatility to Continue


Weaker Canadian Dollar Has Helped Canadian ProducersOSB Variable Production Cost by Region, US Dollars per MSF, 3/8‐Inch Basis

0

20

40

60

80

100

120

140

2000 2012 2018 2020

USA Canada


Rising Wood Costs in the West Driving Variable Costs for Plywood HigherPlywood Variable Production Costs by Region, US Dollars per MSF, 3/8‐Inch Basis

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0

50

100

150

200

250

300

350

400

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20

US South US West West Wood Cost/South Wood Cost (R)


Elevated Price Levels Yielded Tighter Spreads Between Plywood and OSBOSB Discount to Plywood (%)

‐10%

0%

10%

20%

30%

40%

50%

60%

70%OSB Discount to Plywood (%) Average, 2000‐2009


OSB Profitability Rose, but Remained Below Highs from the Middle of the Last Decade

‐50%

0%

50%

100%

150%

200%US South CA West


Plywood Profitability Improving with PricesMill Realization/Total Production Costs

‐40%

‐20%

0%

20%

40%

60%

80%

100%US South

US West


Risks

• Demand– The housing recovery stalls

• Supply– Plywood and OSB capacity are added at a faster rate than we currently

assume– Imports grow more quickly

• Prices– Same as always: Lots of risk


Conclusions

• Recovery in US housing will drive demand growth− Other end-use markets growing, but at a more subdued rate− Both plywood and OSB demand will increase

• OSB will grow more quickly than plywood• Supply will expand to meet growing demand

− OSB overproduction a near-term risk, though likely small− Plywood producers remain disciplined, although import levels are still

strong− Production on the plywood side will lag relative to OSB

• Prices will trend upward with heightened volatility for OSB− Demand will put pressure on existing capacity again in latter half of 2019


Thank you for your attentionFor more information:

North American Lumber & Wood Panels 5‐ and 15‐Year Forecastswww.risi.com/lumber5yearwww.risi.com/lumber15yearwww.risi.com/woodpanel5yearwww.risi.com/woodpanel15year

Lumber, Structural Paneland PB/MDF Commentarieswww.risi.com/lumbercommentarywww.risi.com/structuralpanelcommentarywww.risi.com/pbandmdfcommentary


Jennifer Coskren, [email protected]

RISI Wood & Timber · Tale of Two Markets: Different Growth Outlook for US Plywood and OSB Demand...

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