Sleepers awakening

If Europe is falling over itself to open new OSB plants, North America offers little apparent movement since last year. Where Europe has three new mill openings to talk about, North America has just one – a brave pioneer but a lone one. See our next article on Roy O Martin for an in-depth study. The list of curtailed plants runs to over a dozen, with no outward sign of many of them ever coming to life again. It may seem as though the post-2008 housing recession that closed them down is paralysing all movement.

However, that appearance is deceptive. Below the surface there is activity, or at least preparation for activity.

Anyone who attended the IWF fair in Atlanta last August and spoke to US panel manufacturers there would have been struck by one common, indeed universal, factor. There was optimism and orders all around. Key to that optimism in the OSB market is, of course, housing, as it accounts for around 55% of North American consumption. And US housing starts are rising.

Starts were 1.17 million in 2016 – 5% more than in 2015 - while industry forecasts for 2017 range from 1.19 to 1.40 million. It is true that this is a slow rise and slower than from previous recessions. It is also true that even the most optimistic forecast for the year, of 1.40 million, is well below the peaks of the past, and even below the former, pre-2008, average of 1.5 million a year. But it is a rise, and capacity will have to increase to satisfy it. The mix of housing starts is also encouraging: single-family starts were 9% up; and these use one-third more OSB than multi-family units. Much of the fine calculations of those in the industry, and much of the interest in following those fine calculations, will be focused on how exactly to balance re-opening of closed mills – or the building of new ones – to meet that demand, without overwhelming it and flooding the market. Output from currently-operating plants is now approaching capacity.

Statistics from APA, the engineered wood association, show that for 2016, North American OSB output was up by 7.3% over 2015. This breaks down into a 4.8% increase for the US and 11.9% for Canada. Both Louisiana- Pacific (LP) and Weyerhaeuser saw annual sales rise by double-digit percentages. Norbord’s annual production increased by 6% (source: Norbord annual report fiscal 2016), with record annual production from no fewer than five of its North American mills, although in early May a fire in the woodyard of the company’s mill at High Level, Alberta destroyed some of the mill’s log inventory and production halted for three weeks.

But overall the APA reports that the industry was producing at 88% of operating capacity in 2016 and that it expects this to increase. With demand starting to rise, and the concurrent rise in production approaching a limit, there have been high prices, though with extreme volatility. For most of 2016, makers of OSB enjoyed an enormous surge. Benchmark prices doubled from early May to late August – only to fall by US$100 per 1,000ft2, or 23.5%, by December, to US$375 per 1,000ft2. The overall North Central Average OSB price increase was 29%, US$42 up, year-on-year.

The December fall may have been seasonal drop-off in demand, or may be part of a longerterm pattern. Nevertheless it is worth noting, as David Dugan, spokesman for LP pointed out, that OSB producers still enjoy prices far above the average of US$200/1,000ft2 in the 1990’s. The above situation is in part a consequence of the consolidation that has been going on in the industry for the past several years and that is forecast to continue.

Most bizarre news of the year was perhaps the exchange of mills between Norbord and Louisiana-Pacific. Norbord swapped its Vald’Or facility for LP’s Chambord mill. Both are in Quebec; both have been curtailed for several years, and have been announced as curtailed indefinitely at that. But the move shows both companies positioning themselves for a future that both clearly see as one of growth.

Chambord will need further capital investment before restarting – Norbord says it is still investigating how great that capital investment will need to be. Nor has it suggested any re-start date, save that it will not be in 2017. The logic behind the move is clear: not only is Chambord larger, but "it is located closer to key markets, representing a better competitive opportunity for Norbord. This transaction builds on our long-standing presence in Quebec," says Peter Wijnbergen, president and CEO of Norbord.

“As long as housing starts continue to grow, additional capacity will be needed to satisfy customer demand as the year progresses.” Those last four words imply concrete movements in the short-term rather than in some vague future.

And indeed the company is taking definite steps to that end. Chambord will likely not be the earliest Norbord curtailed mill to re- open. The company’s priority for incremental capacity continues to be its Huguley, Alabama, mill, where, in the company’s words, it has made "steady but prudent" capital investment to ready it for a re-start "when the time comes". The press has been re-built and the company says the mill can be ready to be put back into production within nine months.

To get an overview of the factors that OSB producers will be taking into account, we spoke to a manufacturer who has been supplying almost all of North America’s makers of OSB for 40 years and more, and whose finger is therefore on the pulse of the industry. Hexion is the major supplier of resins to almost all of North America’s wood panels industry. Chief Operating Officer Jody Bevilaqua and Mark Alness, senior vice-president, Forest Products Division, gave us the benefits of their experience.

“I think the mood in North America is very optimistic,” said Mr Bevilaqua. “Over eight or nine years, since the global recession, housing starts fell from 2.2 million right down to 480,000. Now we are seeing rising output at last.” But, as we have seen, it is a very slow rise. Why then the optimism? “Because all OSB plants are now profitable. Some of them are in profit for the first time since 2008. All are doing well,” he said.

Will that optimism be encouraged, or damaged, by the changed administration in the White House? Neither, is Mr Bevilaqua’s answer: “The strength and growth in the US market is independent of the president. It doesn't depend on who is in the White House. We have had inadequate growth in housing for years. The pent-up demand which that has caused is independent of politics. We see that demand in order rates. People are more upbeat than before, there is no question of that. And with less regulation on business, people can make added-value more quickly.”

The new administration has halted recruitment to the Environmental Protection Agency (EPA). The industry might be expected to welcome the promised relaxation of emissions and environmental regulations. Not so, according to Mr Alness.

“The EPA finally grasped what California did years ago in setting low values for emissions. That could be slowed down. I hope it does not slow, because the industry has made great effort to comply with the demands for low emissions. It would be a shame if regulation were relaxed now. The global commodity market is there for all North American production, and overseas customers will want regulated, low-emission products. With regulation you are also able to manage what comes into the country from less good producers,” adds Mr Alness. His point is that North America has good, responsible producers. Relaxing emissions regulations would favour the cowboys from elsewhere. On the balancing act between supply and demand: “OSB is 37 years old in North America. There are around 40 OSB plants running right now. Some more will probably re-start this year or next. We anticipate 5% to 8% year-on-year growth in demand; 3.5 billion ft2 will be needed to satisfy it. And the industry is well placed to supply it,” says Mr Alness.

And, taking the longer view, he continued: “For most of the past two to three decades, growth has been more than 10% a year. A few years ago American producers added world-scale plants. Then, unfortunately, we entered the worst recession ever. When we emerge from it" [which is, roughly speaking, now], "we have the plant and the resources to be ready for the demand. If all the conditions are right, the capacity is there. Some is old, some new. ”

There is a really good chance that all the conditions are right.

“Seven or eight major plants closed in the great recession," continues Mr Alness. "Of the top three or four in that list, perhaps two, perhaps three, from major producers, could re-start very soon. They were very good plants that had the latest technology. The others could probably start up when they are needed; or if someone else builds a brand-new plant, some may never re-start.” And the growth will be tailored to new types of demand. “The first phase of the OSB industry was to take business from plywood and it now has 70-80% of that business, so the new growth will come from elsewhere.

This means that growth comes from innovation: we have engineered beams, specific uses for OSB in housing, and moves into siding. In the next five to 10 years, we will see advances in OSB flame retardancy – Hexion is actively leading there in developing resins that give durability in case of fire. OSB is a panel that uses fast-growing, lowerquality, wood to produce panels that have high qualities of performance, so there is an opportunity for all of us,” said Mr Alness. We mentioned in our first Focus on OSB story that Europe is not homogenous.

America too has its own special character; and opportunities. “America is special because we build houses of wood,” says Mr Bevilaqua. “Latin America has the largest wood resources, but they build differently. Building all-wood houses for Latin America is one of our largest opportunities.” It will be a cultural change that is needed as much as a technological one. “It is a big task, but there is potential there long-term to figure out ways to build.”

“As far as resins are concerned,” says Mr Alness, “three plants in Brazil are ready to start up in 2018. We have invested US$215m over three years in two plants in Brazil and one in North America.”

Mr Bevilaqua sums up future prospects for the industry: “There is short-term control over the evolution of new products, such as OSB sidings, roofings and for fire resistance – part of the innovation in all areas of engineered wood. In the short-to-medium term, we will see continued consolidation, to fewer and larger producers.

"There are currently nine producers in North America – we supply all of them, bar one. That number is not fixed in stone. We see further consolidation and globalisation – perhaps the entry of Kronospan and Arauco into North America, and there is still talk about other empires coming in. That will bring new world-scale capacity in OSB and other panel types.

"There will be continued innovation in new products and resin technology. Highrise wood buildings – that is an area that has really caught attention. The technology for high buildings is a real issue to deal with. It needs durability in wood products, and we have the resins to provide it – and the industry has the ability to produce it. “There is fundamental growth in most regions of the world. We have a leading position in technology. Wood panels are the most sustainable product on earth. The industry should be able to provide the world with building materials for decades to come. It is far more sensible than concrete or steel. It is a very positive position for wood products. We are very happy committing capital to this.

"And, long term, there is the whole sustainability story for wood. In sustainability we have an untapped opportunity for the whole forest industry worldwide. The energy that powers it is 100% solar; manage your forests properly and it is 100% sustainable. It is the one industry that can take CO2 out of the atmosphere. When we all begin to get serious about it this is a huge game-changer. Wood will probably be the one answer to all those problems.”

Hence the optimism in the OSB industry. Far from being in a state of suspended animation, it is poised to open mills and take off again into a revived and changing future, just as Europe has already begun to do. “In Europe we are living the future,” says Mr Bevilaqua.

North America ’s future looks just as Heady.