A shift of focus

He said wet process hardboard is fighting its way back, aided by the fact that its resin costs are lower than MDF, while particleboard is shedding capacity when need for it is growing. Looking to the future he predicted that forest products will not continue to trade globally, saying: "This product doesn't ship well". This would indicate more local manufacturing. "But energy is the long term problem for the industry," he declared. Mr Shotbolt said Flakeboard believes there is considerable waste in the supply chain and far too little research and development to address the lagging competitive stance in North America vis-à-vis international panel producers. He said the focus needs to shift to higher-value products and to products engineered to both reduce costs and meet specific end-uses. The following events have created unprecedented conditions: * Weak US housing and high foreclosure rates reduce demand for composite panel products * Tight lending markets make it more difficult to qualify for mortgages * Wood costs are increasing as sawmills curtail production * Energy costs are increasing, with oil at record levels * Lower house prices impact consumer spending * Imports from China, South America and Europe take growing market share of composite panel downstream markets. He added that environmental regulations will add US$200m to capital expenditure. Mr Shotbolt recalled, "After the 'tech wreck' and 9/11, the US led world interest rates to the lowest levels on record in an effort to protect the economy, but many 'cautious' investors still wanted fixed-income investments. "US housing became the prime target area to attain higher interest rates from high-credit-risk borrowers. Lenders expected house values to continue to increase and offered low introductory 'teaser' rates to sub-prime borrowers. "House values are now in decline and sub-prime mortgage foreclosures are accelerating as those short-life 'teaser' loans come up for renewal and are reset to much higher levels than the introductory rates." Mr Shotbolt said estimates are that banks will take over US$500bn in write-down losses - world credit markets will seize up and interest rate spreads will widen as banks re-price risks. Housing forecasts continue to be weak and will remain so this year and beyond. He said the issue now is the duration of the slump, not the depth, as we are close to the bottom in housing starts. Meanwhile, unsold new home inventory sits at 8 to 10 months and, while price reductions (9%) have started, sufficient inventory has not moved and further price drops, perhaps by 20%, are necessary to spur higher sales, he suggested. Lower home values have impacted consumer spending and may push the US into recession, said Mr Shotbolt, adding that particleboard and MDF demand lags housing starts by six months. There are associated effects for composite panels: Mr Shotbolt said low housing sales mean less demand for lumber so sawmills are curtailing production, dramatically reducing the quantity of residual sawdust and shavings. Competition for residuals is intensifying for uses in 'clean' bioenergy and animal bedding, while the pulp mills have contracted the whole-tree wood chippers because pulp remains in strong demand. Resin costs are another important negative factor for the industry. The contract price hit US$2.86/gallon from US$0.96 last summer. Capacity was constrained by natural gas shortages in Chile, forcing Methanex to shut three methanol plants. However, methanol prices dropped to US$1.90 for April contracts. Mr Shotbolt said the drop in housing will be deeper and longer than originally forecast and that weak demand and high costs have depressed margins. In particleboard, he said the Sonae Tafisa start-up in Lac Megantic, Canada, will set the tone for the balance of 2008, while new capacity will impact MDF markets further in the south and east. Also, hardboard is now competitive with thin MDF as resin costs spike. With the housing market downturn and MACT (Maximum Achievable Control Technology) - related mill closures, there will be capacity curtailment, he said. Five North American particleboard mills have closed since last November - 7% of the industry's capacity - and the industry is starting to balance production to meet the lower demand. Two North American MDF mills have closed since November.MDF consumption in North America still exceeds shipments from North American mills, presenting significant opportunity for those mills to capture markets currently held by imports. Furniture imports remain high as furniture from solid wood, plywood and composite panels continues to flood in, mainly from China. Thus more North American furniture companies have closed, gone bankrupt, or shifted to Chinese imports, while component parts such as cabinet doors are also being produced offshore. Meanwhile, the weak US currency is creating a non-tariff barrier to imports. Working towards stability, he said that rebalancing of supply and demand is under way. Mill curtailments from wood fibre shortages and mill closures from MACT-related spending will determine market strength over the next 18 months, said the speaker, while reduced imports from Europe and South America, due to currency and cost factors, bring new opportunities to domestic supplies. He said Flakeboard is leveraging its strengths and growing its business. It has advantages in both scale and modern mills, as well as an advantageous fibre supply. The company's multiple locations allow for regional supply to a local customer base and it has vertical integration into decorative products and high-value speciality product offerings which can absorb freight costs. Technological breakthroughs in resin application methods offer cost savings and/or use of a wider range of resin options, concluded Mr Shotbolt.