Time for adjustment to a new environment

From 2009 to 2013, the OSB industry in Europe, and particularly western Europe, was in buoyant mood, with most mills having to run flat out to meet increasing demand for panels.

However, those companies in western Europe interviewed for this year's report, on 2014, are finding it increasingly difficult to compete with the large quantity of new capacity that has come on stream in the eastern part of Europe in recent years. Meanwhile the threat to wood raw material supplies from the 'biomass' energy generation industry in western Europe is only getting worse.

In terms of that burgeoning new capacity, consider that, in 2009/10, there was the new 500,000m3/yr Kronospan mill in Brasov, Romania. Meanwhile, at the same time, there was a capacity increase in Luxembourg in the west (though only 20,000m3/yr).

For 2011, we reported that Egger's mill in Radauti Romania was due on-stream by the end of the year, with 300,000m3/yr capacity (later increased to 490/500,000m3/yr).

It was Russia that produced a number of new projects for start-up from 2011/13: Cherepovets phase one (250,000m3/yr in two phases totalling 500,000m3); Kalevala phase one (also 500,000m3/yr in two equal phases); Kronospan Egorievsk (450,000m3/yr); and ORIS LLC (500,000m3/yr). Meanwhile, In Ukraine, there was Krono-Ukraine LLC (200,000m3/yr from a particleboard line conversion).

In WBPI issue 2, 2013, p34, we added Kastamonu Entegre's new mill in Tatarstan (480,000m3/yr) for 2017 (since moved to Q1, 2018) and Kronospan Ufa (250-300,000m3/yr) for 2016/17, both in Russia.

In last year's survey, (issue 2, 2014, p30), Poland was added to the list of planned OSB mills, with Kronospan's mill in Strzelce Opolski due on stream by the end of 2015. According to our correspondent Jaroslaw Adamowski, this line is part-funded by the EU (WBPI issue 1, 2015, p16), but we have been unable to ascertain its proposed capacity.

To summarise that information, eastern Europe will have added somewhere around 4,230,000m3/yr in capacity between 2009 and 2017. To put it another way, that's over four million cubic metres a year in extra capacity since 2009. The existing capacity in all of Europe in 2009 was 'only' 4.35 million m3/yr.

In addition to that increased capacity in eastern Europe since 2009, we can add the following from other regions: that 20,000m3 for Kronospan Luxembourg; 45,000m3 additional capacity/planned capacity at Louisiana-Pacific's mill in Chile; SFC Entegre's 170,000m3 mill in Turkey; Hubei Baoyuan's 220,000m3, Kangxin's 220,000m3, Shouguang Luli's 300,000m3 and Guizhou Yuanfang's 250,000m3, all in China; Pioneer OSB's 220,000m3 in Malaysia; Ipan's 150,000m3 in Italy; and Smartply's additional 150,000m3/yr in Ireland.

That list totals another 1,745,000m3/yr of 'recently-added' capacity in the last five years or so.

We haven't mentioned the other possible new line in the UK yet, as that was not confirmed (see later in this article) as we went to press.

It doesn't seem that long ago that the OSB industry outside North America was all within western Europe and was struggling to sell a production of around three million cubic metres in total!

Unfortunately, demand does currently appear to be lagging supply in general, and this is making trading harder and margins smaller.

Europe
Starting in the western-most part of western Europe, it is by now well-known that Smartply, the MDF and OSB arm of state forestry company Coillte, is building a brand new continuous line at its existing factory in Waterford.

The factory's current 14-daylight multiopening Washington Iron Works press is to be replaced by a Siempelkamp ContiRoll continuous press. -This will lead to the same capacity being produced as now - 350,000m3/yr - as the ContiRoll will ultimately replace the old WIW line. However, Siempelkamp has designed the press for a maximum capacity of 500,000m3/ yr and a spokesman for Smartply said that the extra capacity will be phased in "according to the market and our own strategic initiatives".

When interviewed in mid-February, he reported that the ground works began six to eight weeks previously and that the new line is to be built in what is currently warehousing.

When the Siempelkamp line is commissioned, in the first quarter of 2016, the old line will be closed and dismantled. The building currently housing the WIW line will then be converted for use as warehousing.

"With the new line in operation, we will have the ability to better service more markets in continental Europe," said the spokesman.

Turning to the current market, he said that the company's core markets of the UK, Benelux countries and Scandinavia are trading quite well. The current press size is, however, not suited to the Continental market's requirements. That will change with the new press line of course.

"There has been an impact from the extra capacity in eastern Europe and that has been displacing western-made board from the UK market to some degree, which is the second largest market in Europe," said the spokesman. "That will be the case until the demand and supply is in better balance in [greater] Europe."

The UK panel industry has been particularly concerned by the low-quality, often mislabelled, Chinese plywood being imported into the country by unscrupulous importers, but this could present an opportunity for OSB to substitute for such low-grade boards. In general, Smartply is seeing an underlying increase in demand in its markets.

"I think it will remain difficult throughout 2015, before the European market is really good," said the spokesman. "But our strength is in our approach to the market, with innovative products, not just the bulk commodity board - we are moving away from that end of the market."

The spokesman continued: "The underlying market is not bad at the moment. It's an overcapacity problem with overall capacity growing so fast. We didn't expect it to impact the market quite this quickly, but it is a short-term problem."

Moving slightly east we come to the UK's only OSB producer, Canadian-owned Norbord, with its factory in Inverness, Scotland.

Of course the big news here is the merger of Norbord and fellow north American producer Ainsworth, announced right at the beginning of 2015 when the shareholders of both companies approved the anticipated marriage (WBPI Issue 1, 2015, p5). It is believed the 'courtship' had been going on for about a year.

If it does go ahead, this will create one of the largest OSB producers in the world and, claims the joint company, one of the lowest-cost producers.

Both companies are ultimately owned by Brookfield, a major international and diverse investment company headquartered in North America.

Earlier, Louisiana-Pacific had tried to purchase Ainsworth but the competition authorities threw the deal out, leaving the way clear for Norbord and Ainsworth to merge.

As we reported in last year's Focus on OSB (WBPI Issue 2, p36), Norbord has been considering a new line in Inverness for some time, to replace the eight-daylight Siempelkamp press line currently operating there. Ainsworth does have a continuous Dieffenbacher line in Canada - which it purchased but never took out of its crates due to the poor OSB market at the time - and a management spokesman for Norbord UK said it is possible that line will be shipped to Inverness and built up there to replace the existing one.

The spokesman said that the shareholders had voted for the new line in Scotland and that regulatory approval was expected in April 2015. "This would make us probably the largest producer of OSB in the world [as a merged company]."

However, with Smartply already committed to its new line across the Irish Sea, and the current over-capacity in 'greater Europe', one wonders when would be a good time to add a lot of new capacity in western Europe? And it would be a lot because that Dieffenbacher line was designed for a large output.

"OSB in Europe has a good future," said the Norbord spokesman. "I believe that consumption could double in the next 10 to 15 years. Even if Ainsworth didn't have that line available, I would still be pushing for a new line; and it wouldn't start production for at least two years, anyway.

In view of the lack of a final decision concerning the new line, we have included it as a potential line in Table 2, but not in that total.

"At present the UK market is tough, with a lot of imported board coming in from western Europe as its markets are being displaced by increased capacity from Russia," said the spokesman. "However, the UK market actually grew by 10% in 2014 and that will continue."

A UK government report, released in February 2015 by the National Measurement Office (NMO), into Chinese plywood imported to the UK, revealed that 14 out of 16 companies surveyed that held stocks of Chinese plywood held sub-standard material, with no paperwork trails to prove its quality (see news pages and https://www.gov.uk/government/publications/ eutr-assessment-of-plywood-imported-fromchina).

The report noted that "Given the potential scale of non-compliance in this industry, the NMO is likely to conduct further investigations in this product area in the future".

This confirmation of the poor quality Chinese plywood being imported into the UK (often by 'reputable' importers), which is potentially dangerous/life-threatening in constructional use, seems an obvious opportunity for substitution by OSB.

Norbord also owns the OSB factory in Genk and this ran at its full capacity of 300- 330,000m3, depending on specification mix, during 2014.

Moving to Luxembourg, Kronolux's factory in Sanem produced at its full capacity in 2014 and expects to do the same in 2015. The company, which has a relatively small annual capacity, boosts its range by bringing in OSB products from its sister companies in the group.

"For the next two years, I think it will be quite tough in Europe, before the market in the east picks up," said a spokesman. "The Russian crisis is holding down demand in that country, leading to board coming west. However, low prices may be bad for the producing industry, but they are good for increasing the market for OSB and it is easy for the Russian market to increase consumption. Once customers leave particleboard, for instance, for OSB, they don't tend to go back.

"We started in OSB production in 1997 and have seen capacity increase dramatically in Europe over the years, but consumption has also increased and new applications have been found. For instance, the south of Europe traditionally builds in brick and stone, but last year there was movement towards timber frame housing and Germany and France have already seen increases in its use."

In common with the other European producers of OSB, Kronolux has found it really difficult to increase prices for its panels overall and sees some tough years ahead. "But we have always had good years and terrible years in this industry," said the spokesman.

"But with a slim structure, the companies can survive and family-owned businesses like ours have total commitment to the business. We now have the fifth generation of the [Kaindl] family in the Kronospan business."

Kronofrance in Sully-sur-Loire still has its original design capacity of 400,000m3/yr, although it intends to increase this by about 25% when markets improve.

"Overall, 2014 was getting tougher, especially in the last quarter, but the market was really good until then," said a spokesman. "The downturn was caused by a combination of extra capacity and the economic situation. There were the capacity increases in Russia and Ukraine, lower economic activity everywhere, and a mild winter, which meant that all producers could run well. These factors led to some turbulent areas in the market.

"In 2015, the demand is still there, it's just that the capacity has increased and some eastern European mills are undercutting the prices.

"We achieved some price increases in 2014 until the last quarter, when prices fell back again. Very frustrating. But we expect the demand to increase in the Spring."

In northern Germany, the Egger factory in Wismar continues with a capacity of 360,000m3 per year and produced to that capacity in 2014, according to a spokeswoman.

"Last year was 50/50 in terms of business," she said. "The beginning of the year was a bit slow and then the summer picked up and became more active and it is still very active.

"Russian capacity didn't cause us any problems, though we know others have suffered. We feel that our 'made in Germany' quality is appreciated. In the end it is quality versus price..."

Egger was apparently able to achieve some increase in price in some of its markets, though not of course for 'commodity' board, where competition is steep.

"Biomass is affecting our costs - we really feel it like a trend," said the spokeswoman.

"We normally use the smaller diameter upper part of the tree and our sawmill uses the wider lower part, but if the whole tree goes to biomass it is completely lost to us."

Egger's mill in Radauti, Romania, started production about four years ago with 350,000m3/yr and increased that to 500,000m3/ yr in a second phase during 2014. Thus our previously published additional capacity of 50,000m3 (Table 2, Issue 2, 2014) still to be built was inaccurate.

Production from Radauti mainly goes to the Romanian market and to neighbouring countries.

Glunz in Nettgau has a theoretical capacity of 480,000m3/yr, but produced nearer to 350,000m3 in 2014 as it found the German market decreasing.

"The new lines in eastern Europe seem to be running well and their prices are competitive as they have cheaper wood and energy supplies," said a spokesman. "Also our board is full MDI and theirs is generally MUF core and MDI faces, so their formaldehyde emission levels are not as good as ours.

"We need new market strategies for our board, from DIY to construction (and everything connected with it), to the automotive industry [cars and trucks].

"This year looks hard for OSB generally in Europe, with several new plants coming into operation in eastern Europe and more to come in 2016/17 and this will keep pressure on prices."

All European producers are finding it hard to deal with increasing prices for wood, chemicals and energy.

The increasing use of wood for biomass energy is making life very difficult as EU government subsidies drive log prices ever higher.

"With these subsidies it is not a normal market," said Peter Stadler, managing director of Kronolux. "If someone builds a really big energy plant close to a panel factory it could be very difficult [to afford wood for making boards]. Biomass is the biggest threat to all of our industry and yet it is a purely political discussion and the EPF is trying to put the arguments to the politicians."

The total designed capacity for mills operating in greater Europe in 2014 (excluding any starting up after June 2014) is 6,318,190m3/ yr (see Table 1) and the total for the 'rest of the world', outside North America, is 7,158,000m3/yr.

South America
South America has come a step closer to launching its fourth OSB plant, despite a continued economic slowdown in several key regional markets.

US forest products giant Louisiana Pacific Corp, which already dominates the local OSB scene, aims to begin constructing its third mill in Chile later this year, once it receives environmental consent. It has started detailed engineering, expecting to get the green light by late summer, LP confirmed early this year.

The year-long, US$60m, project may still be subject to delay, depending on when the official approval is finally given, and the state of the Chilean economy later this year. The economy has been weak and housing was slower in Chile in the past year during the transition to a new government in the country.

Nashville-based LP confirmed the new plant, with a capacity of 300,000-350,000m3/ yr, will be located near its first Chilean mill at Panguipulli in the Valdivia region. Like the firm's other two local lines, the plant will feature used machinery shipped from idled group plants in North America.

Louisiana Pacific is not yet revealing from which idled mills in North America it expects to ship the Chilean line. Executives have previously identified possible sources, including plants at Silsbee, Texas and Athens, Georgia in the US and maybe the Quebec site of St Michel.

Last July, the group sold the Athens mill to a wood pellets company but held on to the OSB line's forming section. This March, an LP spokesman confirmed to WBPI "we do have quite a bit of equipment from various mills," for possible use in Chile, but could not confirm whether the forming section was one of them.

The new OSB line will allow LP to feed Chile's growing timber frame housing market, as well as serving promising regional export markets. "We are intending to supply other South American countries with this capacity.... Colombia is doing very well now and Peru is coming back," LP ceo Curtis Stevens revealed at a February Q4, 2014 results briefing.

Another long-term target is Argentina which, although currently in trouble, could soon pick up with a likely change of government, he added.

During 2014, LP South America, which also runs a 350,000m3/yr continuous Dieffenbacher line at Ponta Grossa, Brazil, saw its annual pretax profit fall from US$31m to US$20m on net sales lower at US$150m from US$ 172m in 2013.

The reduced results have been blamed on the weaker economies in Chile and Brazil, plus the stronger US dollar, but ceo Curt Stevens maintained both operations were still profitable.

In Chile, LP reported OSB volumes were down for much of last year but improved in the past three months, rising 16% on higher domestic demand, offset by lower exports. Local pricing was 5% down in the last quarter in the face of increasing US OSB imports, despite the strong US dollar.

The Brazilian business saw its sales volume fall by 27% in the final quarter, mainly due to lower board exports to the Far East. Even so, in the second quarter, LP reported sales, in particular to China, had increased from the Ponta Grossa plant.

LP has been exporting decorative OSB panels from Brazil to China and these have proved a good business, according to Mr Stevens. While its Chilean OSB operations remain more profitable, he stressed that the Brazilian business had proved profitable for the group in every quarter over the past two years. LP continues to try to build up capacity utilisation at its sizeable continuous Ponta

Grossa OSB line, which in August was said to be operating at around 75% of its full capability. The group still has on ice earlier long term plans to add a second mill in Brazil and to manufacture its SmartSide siding products there.

LP made clear it is unlikely to move forward with an expansion in Brazil until it has fully sold the output of its one OSB line there.

In mid-2014, domestic demand for OSB was down, resulting from the sluggish Brazilian economy along with a powerful nationwide distraction - the football World Cup - which was staged in the country.

However, despite the slowdown, use of wood frame building systems continues to grow in Brazil where there is huge demand for new economical housing. Last year LP reported progress in winning new certification for its systems, and an increased number of partners in construction, in a country where brick and concrete remain the norm.

In Chile, where LP has a 270,000m3/ yr capacity at two plants (Panguipulli and Lautaro), 2014 sales volumes were badly hit by a month-long production shutdown at LP's Lautaro mill in June. This resulted from the "catastrophic failure" of an OSB line flaker, which had to be replaced from the US, but the company was able to meet customer demand from its Brazilian mill, reported the chief executive in August.

The LP group has earmarked US$130m for its 2015 capital spending, including part of the US$60m allocated for the year-long Chilean scheme, which is set to continue into 2016. The rest of the group budget will go into converting LP's Swan Valley Manitoba OSB mill to siding products and wider maintenance projects.

While LP Chile has felt the effects of continuing OSB exports from the US to Chile, the group remains committed to its Latin American businesses and still relishes the challenge it has taken on to convert much of the region to wood frame housing construction.

The LP group is confident it will remain the dominant force in OSB manufacture in the region.

Questioned last November about the timing of its latest Chilean expansion plan, ceo Curtis Stevens dismissed a suggestion it might be reacting to potential local competition.

"No, I don't think we have any risk of any competitor putting in production there," he stressed in reply to a question during LP's Q3 earnings call for analysts.

Management of LP's South American operations has just changed, with the group ceo taking direct charge of the growth plans and what has become an increasingly significant part of the group's business.

Following the retirement of executive vice president Rick Olszewski, responsible for Latin America, LP South America's local president Frederick Price will report directly to Mr Stevens, he announced in February.

Planned capacity, 'rest of the world'
Table 2 shows the mills that are currently planned or under construction and shows that, in addition to the planned mills listed in last year's report, there is the Swiss Krono/ Interspan mill in Hungary (the first for that country); MLT Ltd in Russia; Louisiana Pacific in Chile; and Kangxin in China. That totals 600,000m3/yr of upcoming capacity, on top of last year's Table 2 total of 5,230,000m3, giving a total for this year's Table of 5,830,000m3.

Table 2 also lists a new project for Ugra Plit in Sovetsky, Russia. Siempelkamp has received the order for a two-phase development but is not yet in a position to confirm an approximate start-up date for Phase 1 as it is awaiting the conclusion of some matters related to the sale.

The Interspan mill (Hungary) is also a Siempelkamp-supply contract, to be built in Vásárosnaményi, and has two planned phases: one to start production in 2016 and the other at a later date as yet to be advised. Siempelkamp says the ContiRoll is designed to be extended from 28.8m to 38.7m, which, together with the pre-heater, could almost double the capacity, to 2,000m3 per day.

The company MLT (Russia) has also been known as 'Taleon Tera Group' and this is the name under which the contract for the machinery was first announced. Meanwhile, phase 1 of OOO DOK Kalevala (Russia) has started production at 250,000m3 and been moved to Table 1. Phase 2 remains in Table 2.

There is another proposed line in Russia which has been talked about for a couple of years now and this is a plant funded by joint investors from the UK and Canada. It was to be located in the Chovju District of the Komi Republic with an ultimate planned capacity of 500,000m3/yr. However, this plan was suspended in 2014 and remains suspended.

Our source in Russia says that this is now due to the sanctions being imposed on Russia over the Ukraine crisis.

We are now able to report officially that the line shown in last year's Table 2 as "Asia, White OSB" is in Malaysia. It is owned by Besgrade Products Sdn Bhd and is actually named Pioneer OSB Sdn Bhd.

On the minus side in terms of anticipated capacity, Cherepovets Plywood and Furniture has cancelled its planned OSB line as it has decided not to produce this type of panel after all.

The total of 'committed' new planned capacity (excluding Norbord at this stage, until confirmed) is 5,830,000m3/yr (see Table 2).

Conclusion
While western Europe has one definite (Smartply) and one possible (Norbord) major new addition to capacity upcoming, as we have seen, it is once again eastern Europe that is leading the way in terms of major capacity additions and that is mainly down to Russia.

With its vast forest resources, surely that country is likely to dominate new capacity developments in all panel types in the coming years (once the sanctions issue is resolved).

However, we mustn't overlook the significant contribution of China to our Table 2 future capacities. Many said that Baoyuan was a mistake, and a one-off for OSB in that country, but it seems they were wrong. With 770,000m3/yr of new capacity definitely committed for 2015 production, that country should have just under one million m3 of capacity in OSB by the end of this year. And maybe that's not all....watch this space!