Industry tied to housing by ‘umbilical cord’

Len Guss doesn't mince words when he assesses the panel industry and related sectors in North America. Then, again, he's not a doom-sayer either.

"Everyone knows of the current sad state of the panel industry in North America," says Dr Guss, who has consulted to the panel industry since 1970. "It is tied by an umbilical cord to housing, which has struggled along since 2008."

Dr Guss is president of Leonard Guss Associates, Inc (LGA) and has been involved with the panel industry in many capacities, both in academia and business, including Weyerhaeuser Company as associate director of research and development and, later, director of corporate economic and market research.

Earlier in his career he worked with the Battelle Institute, Columbus, Ohio, as an industrial economist. There, he headed a section dealing with economic and market research on forest products, building materials and related areas. In 1970, he established the consulting firm LGA, which has conducted hundreds of key forest industry marketing studies worldwide.

He has a BA in zoology and chemistry from the University of Pennsylvania; an MBA from Drexel Institute of Technology; and a doctorate in marketing from Ohio State University. Dr Guss was asked by WBPI a number of questions relating to the panel industry in North America and worldwide.

WBPI: Describe the current state of the panel industry in North America.

Dr Guss: The panel industry in North America has struggled since 2008. Mills have closed, some permanently, some awaiting better times. Those that have survived have been flexible, newer and lowest cost. It has provided an opportunity for management to close marginal mills.

Oddly, it has been harder on OSB than on softwood plywood, and has somewhat slowed the ever-increasing substitution of OSB for plywood. Plywood consumption in 2011 was off about 48% from 2006, OSB fell 50% over the same period from that peak year. Part of the reason is that plywood has industrial markets (furniture, cabinetry), which are of less importance for OSB. It is also the more favoured - and still better known to the casual user - DIY panel.

WBPI: In terms of capacity, where are we in the area of supply and demand in North America?

Dr Guss: 'Capacity' is one of those strange words whose meaning is elastic. Capacity is often measured as being what the press can produce on a three shift, six-day basis. But in very good times we have had no problem producing above 'capacity,' which is sort of an oxymoron. Mills can operate seven days, press times can be shortened, different resins can set more quickly, older equipment can be upgraded or replaced - there are many small ways to improve throughput, which is not the same as capacity.

That said, we are operating at about half nominal capacity from working mills. But this can be misleading. Production can be quickly ramped up with a surge in demand at least by half; achieving full capacity could take a year or slightly more, as mothballed mills are resuscitated, workers rehired and trained, etc.

WBPI: How have imports impacted the North American panel industry? What is the market share breakdown between imports and 'local' panels?

Dr Guss: Imports have dropped substantially from a few years ago when they were a serious concern, but only in structural plywood. OSB imports from outside North America have always been negligible.

Imports of structural plywood have plunged for a number of reasons: Brazil is the major supplier and its currency is so strong, especially against the weak US dollar, that plywood suppliers there can no longer afford to sell to North America (NA); conversely local (Brazilian) demand has surged so it is more profitable to sell at home; and, of course, the shrinking NA demand has made it harder for everybody. In 2011, imports of structural plywood comprised fewer than 4% of supply compared to almost 9% in 2005 - a drop by more than half.

There has been a similar, but not so severe, drop in imported hardwood plywood, from 1.7 million sq ft in 2006 to 1.2 million in 2011 (42%); again in line with the plunge in housing starts and the DIY markets for doors and plywood.

WBPI: What are some new applications for panels?

Dr Guss: We believe that deeper penetration into existing applications is the path to increased consumption. Panels have been around for just over a century and in that time lots of good people have developed and improved many uses for them in construction, furniture, packaging etc.

From our marketing studies we see growth in components such as SIP (structural insulated panels) and other factory production of housing and sections, which relies more on panels than 'sticks'. Particleboard continues its amazing growth, mostly outside NA.

In penetration into structural and semistructural applications, MDF has stalled, but we expect penetration will be renewed as construction picks up. OSB has put only a 'toe in the water' for siding; we expect this will grow. There is room for much more innovation in panels, mostly OSB - as illustrated by various overlays in metal and plastics - for specialised markets.

WBPI: We've seen some major players in the NA panel production industry close their doors or drastically reduce production. Why?

Dr Guss: Each company in the industry has unique characteristics which affect their strategies. Aside from the obvious closures due to slack demand, which has affected older, marginal mills, high-labour-cost mills etc, there are a number of reasons. Some companies have never been able to shed a high-cost approach to product manufacture, and so have retreated to growing and selling timber as the mainstay of their revenues.

Others have looked to businesses such as pulp & paper, or the current fad in pellets, with more encouraging growth prospects.

Those companies which are more flexible in selling, and especially in product innovation, have done better. Most NA producers have long been commodityoriented; (which has inevitably led to housing as the only market big enough to take commodities), as opposed to European producers which have developed many smaller segments of the market.

Some NA producers have turned successfully to an array of panel specialities, which offer improved opportunities. And of course there has always been the route of merger and acquisition as some grand old names in the industry disappear. One hazard is peculiar to countries such as Canada, where mills are owned by US firms; these mills are often subject to closure first, to protect the domestic mills as much as possible.

WBPI: In the panel production industry, which country is healthier, Canada or the US and why?

Dr Guss: In plywood, Canada is somewhat 'healthier,' having suffered a 30% drop since 2006, compared to a 33% drop for the US. Of course, Canada's plywood industry is very small compared to the US and is bolstered by Canada's better position as an exporter.

OSB is another story; quite the reverse. Canadian production fell 46%, while US production fell by a third, illustrating the point I made above - that US firms elected to protect their domestic sources first.

WBPI: What of the future outlook for panel products in NA?

Dr Guss: This depends mostly on housing, the economy and job outlook. We at LGA do not agree with the general air of pessimism affecting the standard forecasts for US housing. We think housing will rebound faster - and surprisingly so. Most economists seem to rely in their models on more recent data rather than past experience, which has led to significant errors (as we all know).

I am more optimistic and expect US housing to steadily grow in 2012 and be at the million-plus level by 2014-15. The unsatisfied demand is huge in terms of population, population geographic shift, immigration and replacement. As banks regain confidence and courage and lend with more reasonable standards - and as the overhanging inventory is used up - housing will regain strength.

People forget just how quickly housing can recover. This is because there are about 100,000 builders in the US, each of whom can produce one to five houses a year, plus the giants of course. As one example, in June 1982, housing starts were running at the rate of 902,000 units a year. In June, 1983, one year later, they were running at the rate of 1,733,000 units a year, a 92% increase. Pessimism usually turns out to be less accurate than optimism.