Developing economies in Asia and Latin America have out-performed the developed world, particularly Europe and the US. However, there have been exceptions; resource-rich economies such as Canada and Australia have done far better as they helped to supply the booming developing world economies with basic materials.

The US economy recorded moderate growth in 2010 (GDP climbed 2.9% after dropping 2.6% in 2009) – by historical standards a weak rebound. The primary reason for this lack of significant momentum was the historic weakness in the housing market. In a ‘normal’ cycle, housing would be dragging the economy out of recession, helping to propel GDP growth to a 4-5% rate.

This time (because of the excesses earlier in the decade – too many homes built; too much credit; over-extended consumers), new home construction tumbled to its lowest levels since the 1930s and the whole housing market approached a state of paralysis in 2009.

Some loosening of housing markets was realised in 2010, but continued concerns about foreclosures, falling prices, high unemployment and tight credit requirements (even though US mortgage rates were and are low…if you qualify for a loan!) have hampered recovery.

Particularly bad winter weather in 2010-2011 has helped to keep housing on the ropes. Consequently, if 2009 “was equivalent to Round 14 in a knockdown heavyweight 15-round fight”, 2010 was Round 15, and now the timekeeper has decided to add additional rounds in 2011 and probably 2012!

For North American panel producers, senses have been dulled by the steady pummelling they have suffered over the past five years, and the general expectation is that things will not really improve much before 2013. This is a much more cautious outlook than published last year; your analyst hopes to be proved wrong as recovery comes sooner rather than later; and not because recovery is even further down the road than expected!

Key to this improvement, of course, will be the pace and timing of the recovery in US housing markets. While the February 2011 housing reports were all very gloomy, winter weather probably had a lot to do with that.

Supporting a recovery in housing later in 2011 will be growth in employment and incomes; still-low mortgage rates; lower home prices; slackening in the foreclosure crisis; and growing pent-up demand for homes.

On the negative side are higher oil prices; rising interest rates as markets fret about the behaviour of the US Congress and the Tea Party; and still-large stocks of unsold homes.

In North America, Canadian housing has helped to prop up the region’s new home production: In 2010, Canada built 192,000 homes (up 29% on 2009) accounting for 25% of total North American housing production.

In contrast, US housing starts (excluding mobile homes) were just 586,000 units, up just 6% over 2009 (Table 1). Canadian starts will continue to out-perform their long-term-trend share of North American housing, accounting for 22% of total supply in 2011 and 18% in 2012. Only as US housing production accelerates in 2013 will the Canadian share approach its traditional 10-11% level.

While 2009 was likely to have been the cyclical low for housing production, the improvement in 2010 was small and 2011 will be hard-pressed to climb much above 2010.

By the second half of 2012, the recovery in housing is expected to finally gather momentum. This acceleration will be reflected more fully in 2013 when North American housing production is expected to exceed 2007, start to approach underlying demand levels, and begin to meet some pent-up demand.

While the recovery in total housing production will be favourable for wood based panel producers in North America, the changing mix of new home construction will be less favourable.

Housing strength is likely to be concentrated more in rental than for-sale units over the next several years, and this will likely favour multi-family construction (high-rise and low-rise) as well as somewhat smaller average sized single- and multi-family units. The single-family share of US housing starts is forecast to slip from a very high 80% in 2009-2010 to 73% in 2011 and to 63% by 2013 Meanwhile, the average size of new single-and multi-family units built will continue to be lower than over much of the past decade.

What does this mean for North American wood based panel demand and production?

The first point to note is that total panel demand is more than just consumption in new home construction. Other end-use markets also contribute to demand, particularly nonresidential construction, residential repair and remodelling, furniture production (especially for particleboard and fibreboard) and other industrial markets (eg packaging and crating).

With the US and Canadian economies expected to sustain growth in GDP and industrial output over the next three years, panel consumption in these other end-use markets is expected to climb at least moderately, especially in 2012-2013.

The graph on p44 shows our expectations for North American panel production over the next three years as compared with the 2005 peaks and reported 2010 data. In all panel types, production is not expected to get back to 2005 levels any time before 2013.

OSB is expected to be first to make an effective run at its 2005 peak, starting in 2013. However, given the importance of housing starts to demand, its recovery will depend on pace and timing of the US housing recovery.

Practically all the increase in OSB demand will translate one-for-one as increased North American production (imports will remain insignificant). Consequently, we look for OSB production to exceed 20 million m3 in 2013, about 50% above 2010, but still below 2005.

For plywood, loss of market share to OSB has moderated from a decade ago, but the primary end-uses for softwood plywood (eg industrial, residential repair and remodelling) will also be among the slower ones to improve in the next few years. Consequently, plywood production will struggle to recover to 10 million m3. Imports will continue to meet a large portion of demand, notably from Chile.

However, plywood imports from Brazil will remain low until domestic North American prices rise sufficiently to cover the high-currency-adjusted costs of Brazilian plywood, plus the increases in ocean freight. Brazilian product is unlikely to again be a significant factor in North American markets before 2014.

For particleboard and MDF producers, 2010 saw little or no recovery and this will be maintained in 2011. This reflects the longer lags between a pick-up in construction activity (eg housing starts) and increased consumption of panels in cabinets, flooring, millwork and, eventually, in the furniture for new homes. Also, import competition will remain a serious problem in furniture markets.

Perhaps surprising was the drop in domestic MDF/HDF production in 2010. While imports increased (now to over 35% of North American apparent consumption), the drop in domestic output, despite the overall market recovery, and the Chilean earthquake disrupting MDF exports to the US, was unexpected.

The high price of MDF relative to substitutes such as particleboard probably goes a long way to explaining this result. Currently, US MDF prices are the highest relative to particleboard in over a decade and further loss of market share is therefore a logical market outcome. This is particularly the case in end-use applications where particleboard’s qualities and performance are adequate to the task in hand and save the oem the substantial price difference (in North America, ¾in MDF is currently 50-75% more expensive than ¾in particleboard).

Previously, we had suggested that consumption of North American MDF/HDF could outstrip particleboard at some point over the next few years. This now seems less likely; and in the case of domestic North American production, we expect particleboard output to continue to run well ahead of MDF/HDF (by 3 million m3 in 2013 – Table 2). Nevertheless, despite this one-plus million m3 increase in particleboard output between 2010 and 2013, production will remain well below 2005 levels (see figure below).

While no new records will be set in consumption or production in North America over the next several years, much of the improvement in profitability recorded in 2010 will likely be maintained in 2011-2012, despite increases in fibre and resin costs. The massive amount of permanent and temporary capacity closures has largely brought supply in line with demand; producers will be very hesitant to bring back curtailed and closed operations. Increased costs will at least in part be passed through to customers, despite their opposition!

The greatest pressure on margins will continue to be felt in the US west where the effects of increased Chinese demand for logs and lumber continue to ripple through veneer markets, pushing plywood costs up sharply.

Meanwhile, continued weak markets in California and the southwest have hampered particleboard and MDF pricing abilities and western particleboard producers are looking at another very poor year.

Overall, further North American closures in particleboard capacity would help markets a lot; the same may be said for MDF. Structural panel markets are in better balance, but without early improvement in demand, North American plywood markets will likely need to face up to more capacity rationalisation.

However, increased plywood exports to Japan by JAS-certified mills could give a boost to North American plywood markets, offsetting domestic market weakness: JAS-certified Canadian mills would ship to Japan and US mills would replace Canadian plywood in domestic Canadian markets.

A strong Canadian dollar has already boosted US shipments into Canada and recent (post-earthquake) Japanese market development would boost this shift.

This year has started off very anaemically for North American panel producers. Production likely dropped below year-ago levels in the first quarter and will struggle to exceed year-earlier levels later in the year if housing simply continues in its quagmire.

A year from now, we may see that the recovery in wood based panel markets faltered in 2011; only better levels of construction and furniture production activity in the last half of this year will make such an observation largely inaccurate and inappropriate!