From chaos comes (hopefully) order.....

More than one ceo in the North American forest products industry in recent months has been heard, while reviewing their company’s 2009 performance, to describe the past year as the worst business year they’d ever seen.

“It was the most chaotic year I have experienced in my 33 years in the industry and it was a very, very difficult year in which nothing came easy,said Louisiana-Pacific’s (LP) ceo Rick Frost during a Februaryconference call. “Needless to say, it was not a year that any of us would care to repeat.”

The permanent mill closures implemented in 2009 – two of them LP’s and so recent they had not been formally announced prior to that February 2010 conference call – have removed another 1.5 billion ft2 from the North American market for good.

An additional two billion ft2-plus of capacity has been indefinitely curtailed during the last year for market reasons.

The first mills to close permanently in 2009 were Ainsworth Lumber Co’s remaining two former Potlatch Corporation facilities in Minnesota – Bemidji, with a capacity of 350 million ft2/year, and Cook, with a capacity of 440 million ft2/year. Both had been indefinitely curtailed since 2008 when Ainsworth finally pulled the plug on them during the first quarter of 2009, as it had with the Grand Rapids mill the previous year.

Louisiana-Pacific took the decision in the fourth quarter of 2009 to permanently close its Athens, Georgia, and Silsbee, Texas, OSB mills, which had both been indefinitely closed for some time. LP’s 350 million ft2/year Silsbee mill had been curtailed since August 2007, while 375 million ft2/year Athens had been curtailed since the fourth quarter of 2008.

In the February conference call on related to LP’s fourth quarter and full year financial performance, Mr. Frost said: “This is about 725 million ft2 of rated capacity that moves into the permanently-shut graveyard that has been created by this downturn.”

New market-related curtailments announced during the first quarter of 2009 were Norbord Inc’s 500 million ft2/year Huguley, Alabama, and 415 million ft2/year Jefferson, Texas, mills, along with Tolko’s brand new, state-of-the-art Athabasca division in Slave Lake, Alberta, with a capacity of 800 million ft2/year that was in start-up mode when indefinitely curtailed.

Georgia-Pacific’s 375 million ft2/year Grenada, Mississippi, mill took an indefinite market-related curtailment in the fourth quarter of 2009, although 375 million ft2/year Mount Hope, which went down in January 2009 was back up by March, according to company officials.

These OSB mills indefinitely shut in the preceding four years all remain closed:

* 700 million ft2/year Footner Forest Products (an Ainsworth/Grant Forest Products joint venture), curtailed since November 2007

* 640 million ft2/year Canfor PolarBoard mill at Fort Nelson, British Columbia, curtailed since January 2008

* 170 million ft2/year Georgia-Pacific Dudley, North Carolina, mill, curtailed since December 2006

* 520 million ft2/year Grant Forest Products’ Timmins, Ontario, mill, indefinitely closed initially as a result of a labor dispute/lockout that began in September 2006

* 760 million ft2/year Grant Forest Products’ Englehart, Ontario, mill, reportedly curtailed for market reasons since Februry 2008

* 170 million ft2/year Longlac Wood Industries facility in Longlac, Ontario, curtailed since October 2006, sold in December 2009, but new owner has no current plans to reopen it

* 470 million ft2/year Louisiana-Pacific Chambord, Quebec, mill, curtailed since the fourth quarter of 2008

* 750 million ft2/year state of the art Louisiana-Pacific Thomasville, Alabama, mill, curtailed for market reasons since being closed by a fire and explosion during start-up phase in the second quarter of 2008

* 642 million ft2/year Tolko High Prairie, Alberta, mill, curtailed since the first quarter of 2008

* 250 million ft2/year Tolko Slave Lake mill, shut since the first quarter of 2007

* 550 million ft2/year Weyerhaeuser Hudson Bay, Saskatchewan, mill curtailed since mid-2008

* 470 million ft2/year Weyerhaeuser Wawa, Ontario, mill, curtailed since the fourth quarter of 2007.

That adds a little over 5.8 billion ft2 in ongoing indefinite curtailments, for a total of just over 7.8 billion ft2/year of ongoing, non-permanent, market-related shuts.

If you add to all the above the mills permanently shut between 2005 and the end of 2008 – LP’s Woodland, Maine, 260 million ft2/year, closed in 2005; LP’s St Michel in Quebec, 500 million ft2/year, closed in 2007; Ainsworth’s Grand Rapids, Minnesota, 390 million ft2/year, shut in 2008; Martco’s Le Moyen, Louisiana, 350 million ft2/year, closed in 2007; Weyerhaeuser’s Drayton Valley, Alberta, 415 million ft2/year, closed in 2008; Weyerhaeuser’s Miramichi, New Brunswick, 430 million ft2/year, shut in 2008 – North American OSB production capacity is currently running about 12 billion ft2/year lighter than in its heyday in the middle of the last decade.

Of the indefinite curtailments still ongoing, I make it 5.97 billion ft2/year for Canada, 2.2 billion ft2/year for the US. And that’s only if you believe that, with luck and a fair market wind, all of those curtailed mills will at some point reopen.

Personally, I’m sceptical.

Arguably the biggest question mark hangs over the prospects for some of Grant Forest Products’ OSB mills now Atlanta-based Georgia-Pacific (GP) has stated its intention to acquire most of the beleaguered company’s assets.

Grant has an annual OSB production capability of 2.4 billion ft2 from plants in Ontario, Alberta and South Carolina (3.23 billion ft2/year if you count Clarendon County, which has never been online).

However, prior to Grant filing for bankruptcy protection in Canada in mid-2009, the US residential housing market slump had taken a toll on its operations. The company’s 520 million ft2/year OSB mill in Timmins has been closed since September 2006, originally as the result of a labour dispute, and its Footner Forest Products joint venture OSB mill with Ainsworth Lumber Co in Alberta has been curtailed since the end of 2007.

Despite a robust announcement earlier this year about its intention to acquire the Grant assets, GP has encountered a fair amount of local and political opposition to its plans. There are concerns the Atlanta-based forest products giant will operate only the profitable Grant mills, leaving many permanently without jobs in parts of Ontario, even while securing access to publicly-owned timber resources.

At the very least, after more than three years gathering dust in the cold northern climes, Grant’s Timmins mill would be an unlikely candidate for reopening any time soon – a concern apparently shared by Grant Forest Products.

Towards the end of February, Grant Forest Products’ boss, Peter Grant, was reported to be making a last-ditch appeal to retain ownership of the company. Grant believes the proposed sale aims to keep the Englehart plant open but permanently close Timmins. As the deal has to have the approval of the federal government, because the prospective buyer is not Canadian, Mr Grant said he was hopeful government would “take into account the profound and lasting effect foreign ownership would have in this area," the Northern News reported.

Mr Grant said he hoped the banks would realise that, if the proposed sale did not take place, his company could work its way back to profitability and that he was committed to reopening the Timmins plant.

In early March, however, the Canadian competition authorities found no competitive threat in GP’s proposal to acquire the Grant assets, inching the US giant’s acquisition bid closer to success.

Meanwhile, GP continues to maintain that the status of its own Dudley, North Carolina, OSB mill is a market-related, indefinite curtailment.  But the mill has been shut since December 2006, has a small capacity by today’s standards – 170 million ft2/year – and is located in the adjacent state to Grant’s two new 800 million square feet/year OSB mills. One might speculate that the Dudley mill’s prospects of reopening may have deteriorated when GP set its sights on the Grant assets.

The first of Grant’s new South Carolina mills to complete, Allendale County, has been operating during the recession and Grant’s vice president, Woodlands and Environment, Bob Fleet told Forestweb in October 2009 that, while the company’s second new South Carolina mill in Clarendon County has never gone on line, it is ready to start-up when the OSB market improves and the company’s situation is resolved.

Another acquisition situation casts a question mark over the prospects for the Longlac Industries mill in Ontario, which also has a capacity of 170 million ft2. The mill was indefinitely curtailed by Kruger Inc in October 2006 and formally closed on January 31, 2009, along with the Longlac plywood mill, shortly after Kruger and Norbord Inc announced a plan to form a hardwood plywood joint venture at Cochrane, Ontario. The Longlac facilities were sold in December 2009 to a local consortium, Kenogami Industries, comprising the Municipality of Greenstone, Ginoogaming First Nation and private investors. But the new owner has no plans to reopen the mill.

Mayor of Greenstone, Michael Power, said on February 3: “The plants are shut down and we have no current plans to reopen the facilities and begin any form of manufacturing or processing. The group bought the assets in Longlac to prevent the buildings being torn down. We wanted to ensure that the facilities were available in case we could find an investor to come here.“

Of the state-of-the-art mills that were built and commenced operations during the boom times, two were idled while in start-up mode, at different times and for different reasons.

LP started up its new Thomasville, Alabama, OSB mill in March 2008, but closed it following an explosion two months later. The continuing poor state of North American OSB markets has since thwarted hopes of resuming production and LP’s director of OSB, Jamey Barnes, told Clarke County commissioners in December 2009 the company was unlikely to reopen the mill until late 2010, or sometime during 2011.

Tolko indefinitely curtailed its brand-new 800 million ft2/year engineered wood facility, the Athabasca Division, in Slave Lake, Alberta, on February 13, 2009. Then-president of Tolko Marketing and Sales Ltd, Brad Thorlakson (appointed Tolko’s CEO early in 2010), said on announcing the closure: "The ramp-up of any large-scale facility is difficult at any time. Athabasca Division had the additional challenge of coming online during a market down cycle unprecedented in its severity and duration.”

Capacity vs output?

While assessing the remaining production capacity on the North American OSB market is not too difficult, it’s hard to put a precise figure on the actual amount of OSB produced during 2009. Some companies have been fairly open about having cut shifts or taken periodic downtime at many mills during the economic slump, but others – notably the private companies – refuse to discuss operating capacities.

Norbord’s North American OSB mills operated at about 60% of capacity in 2009, compared to 80% of capacity in 2008, CEO Barrie Shineton said when presenting the company’s fourth quarter and full year 2009 financial results at the end of January 2010. That included the two aforementioned indefinite mill curtailments.

The Arbec Forest Products OSB mill in St George de Champlain, Quebec, formerly owned by Tembec Inc, is one of the smaller mills that has survived by taking short-term downtime. According to mill manager Pierre Gingras, production capacity at the mill – which primarily ships product within Quebec, with some going to the Northeastern US – is still 283 million ft2/year, 3/8in basis. However, the mill did shut for 20 weeks in 2009, removing about 35% of that capacity from the market. Gingras said the mill operates three shifts, 24/7 and at the time we spoke in early February, the mill was operating at full capacity.

In a recent quarterly statistics report, released in January, APA-the Engineered Wood Association said that North American OSB production totaled 14.082 billion ft2 for 2009 – 4.423 billion ft2 lower than in 2008 (18.505 billion ft2). Annual US production dropped 26.19% to 9.598 billion ft2 in 2009 from 13.003 billion ft2 in 2008. Canadian production was 4.484 billion ft2 compared to 5.502 billion ft2 in 2008.

Production of OSB floor sheathing for the whole of 2009, at 2.9 billion ft2, was 34.2% lower than in 2008 (4.407 billion ft2), according to APA.

New mills?

Most of the new OSB production facilities built just before the bottom dropped out of the market were designed with added-value products in mind. So whatever the pace of recovery of demand for commodity grade OSB, those mills have the flexibility to operate to a variety of market needs.

As noted, LP has repeatedly stressed its intention to restart Thomasville, frequently called its ‘flagship’ OSB mill, once the market recovers. At Grant, Bob Fleet’s remarks indicated the Clarendon County mill could be reasonably quick from the gate once the ownership of Grant’s assets is resolved.

Meanwhile, Ainsworth spokesman Bruce Gibson said on March 9 that the company’s second line at Grande Prairie – on which progress was halted in December 2007 – had about a year of construction left at an expected additional cost of about C$100m. The facility was at an advanced stage of construction when escalating costs and plummeting demand forced the halt.

“Ainsworth plans to complete construction of the second line,said Mr Gibson. “Timing has not yet been determined, however; we are currently reviewing the project.”

Mr Gibson was unable to comment on the status of the Footner joint venture mill it shares with Grant Forest Products, but he did confirm that the asset was not a part of discussions related to GP’s potential Grant acquisition.

The question of whether Huber Engineered Woods will ever recommence work on its proposed new OSB mill in Emmanuel County, Georgia, is an intriguing one. Efforts to get Huber to discuss its plans – or indeed any of its mill capacities – have repeatedly failed. Andy Riley, president of Swainsboro/Emanuel County Joint Development Authorities, based in Swainsboro, Georgia, said in an e-mail on March 5:  “We are in the process of waiting on them to set a date in the near future to meet with us to give us an update on their intentions. With the market still as it is, I don’t foresee them starting up the plant soon but that is just my guess.”

Another project that has been the subject of more talk than action in the past four years is Arizona Forest Restoration Products’ proposed OSB mill near Flagstaff, Arizona. There was some movement in 2009 with respect to state legislation that would help AZFRP secure the National Forest timber resource it needs evidence of before it can attract further investment in the project. But then it all went very quiet again until, in February, 2010, AZFRP announced the successful completion of its second round of funding.

In a February 12 press release, AZFRP said it was ready to engage in the permitting process for the OSB facility in Winslow, which is expected to support up to 600 jobs and save taxpayers at least half a billion dollars from footing the bill to remove wildfire fuel from 30,000 acres of national forests per year over the next 20 years.

“The multi-investors, multi-million dollars deal in shares and warrants of the company stock concludes successfully the company’s efforts to progress towards the creation of an appropriate-scale economic engine to fund ecological restoration of forested ecosystems in northern Arizona toward a fire-adapted ecology,the release stated.

“This appropriate scale industry effort parallels and complements the collaborative stakeholders’ effort to produce the social license to proceed with the project, and the US Forest Service effort to progress toward the long-term large-scale wood contract necessary to guarantee the fibre supply required to trigger the full funding of an OSB plant in Winslow, AZ.”

Pascal Berlioux, President & CEO of AZFRP said: “The economic fundamentals of an appropriate size and collaborative OSB project in Arizona remain superb despite the recent economic downturn and housing crisis, and the successful completion of our second round of funding puts us in the best possible situation to complete the full funding of the plant as soon as the wood contract is awarded.

“In the meantime, we are now fully ready and fully funded to initiate immediately the half million dollars permitting process as soon as the proper contracting mechanisms can be worked out with the Forest Service, and we are willing to commit to innovative approaches. We look forward to partnering with the existing northern Arizona logging and processing wood industry to create 600 jobs, boost rural economic development to the tune of 170 million dollars per year, and reduce the risk of catastrophic wildfires at landscape scale over the next 20 years in an economically, socially, collaboratively and environmentally responsible and sustainable way. Today is a good day for the forests and the people of northern Arizona.”

On March 5, AZFRP chairman Donald Walters said in a brief telephone conversation: “We’re absolutely alive. We don’t have a lot of interest in waving a flag at this point. I’m quite comfortable with [the project’s progress].”

Housing in the driver’s seat – 2010 and beyond

In LP’s February 10 financial conference call, Rick Frost told analysts: ”I would be less than honest with you if I didn’t admit up front that I am very happy to put 2009 in the books end behind us…the entire year was characterised by managing our capacity to our customer’s immediate needs and our employee’s focused discipline on spending and inventory reduction.”

The remark echoed the sentiment of Norbord’s Barrie Shineton when reporting his company’s 2009 results on January 29: “We started the year on the defensive. Markets for our building material products remained exceptionally weak due to the ongoing deterioration of housing activity in both the US and the UK. Our priorities were twofold: stabilise the balance sheet and conserve cash. I’m pleased to report that we progressed well in both areas.”

OSB producers are acutely aware that all hopes of meaningful improvement for their businesses rest on the US residential housing market bouncing back, and the sustainability of that recovery when it comes.

“A housing market recovery, albeit fragile, is evident in North America,said Mr Shineton in January. “Recent forecasts indicate that US housing starts will be in the 0.6 million to 0.8 million range in 2010. In our view, starts will likely be around the mid-point of the range, representing a 25% increase over 2009. Limited mortgage availability, high unemployment and an unprecedented level of foreclosures will continue to dampen any near-term housing strength in the US. Longer-term, the demand fundamentals of new household formations and immigration will eventually push housing starts back to the 25-year trend of 1.5 million per year.”

Mr Frost noted that housing starts in 2009 had been about 550,000. “That is down around 39% from 2008. . . .We have made our plans for 2010 based upon an assumption of 700,000 new residential starts all-in. That is single family, multi-family and manufactured housing and about 160,000 new residential starts in Canada,said Mr Frost. “It is our opinion the housing market will ebb and flow over the next several quarters as it slowly improves. Any recovery in new residential starts will be constrained by lingering foreclosures, slow home price appreciation, continued high unemployment and credit that is just hard to get. This makes the short-term outlook difficult to call given the departure from any historical norms.”

Mr Frost also said, in answer to an analyst’s question during the conference call, that he believed homes built in the US this year would be smaller. “We heard a lot at the International Builders Show about [how] the builders that were building were searching for price points that would be competitive with foreclosures. . . . . Lower square footage will affect all of the businesses obviously. . . .because it just uses less volume,he said.

In a market snapshot provided in February, Craig Adair at APA-The Engineered Wood Products Association, said:  “If 2009 was a year of transition from recession to modest recovery, 2010 should be a year of transition from recovery to self-sustaining expansion…..The outlook is for increased structural panel and engineered wood production in 2010 and for several years beyond.”

While some elements of the economy were expected to fare better than others, he said: “By early 2011, progress is expected in areas of household formations and the glut of vacant housing, existing homes for sale and the commercial real estate bust.

“For the first time since 2005, residential construction is expected to boost rather than drag down the economy this year. After having stabilised at the end of 2009, housing starts should rise steadily through 2010 and 2011. “

Mr Adair cautioned that new residential construction was still on shaky ground at the start of 2010, and that a full market correction is not yet evident, noting: “Rising foreclosures may send house prices back down in the first half of the year.“

However, he said housing should get back on track by the second half of 2010, with high levels of affordability driving greater demand, and mortgage interest rates still low by historical standards.

“A more stable housing market should encourage lenders to loosen standards,said Mr Adair, who noted that credit remains scarce to all but the best credit risks. but that this should get better in 2010 and beyond.

While the repair and remodeling market should increase along with the improving economy, and industrial markets are beginning to pick up and are expected to grow steadily, he said non-residential construction was still in a cyclical downturn caused by credit problems and not expected to get back on track until 2011.

When APA released its second-quarter 2009 production statistics for structural panels, it noted that the weak housing market had “upset the mix of structural panels going to end-use markets.”

In 2004, new residential construction accounted for 57% of US/Canada domestic consumption of structural panels, while in 2009 it accounted for just 28%; “all othermarkets accounted for 43% of production in 2004, but a whopping 72% in 2009, the second-quarter report stated.

“In 2006 and 2007, North American production had reached a peak OSB percentage of 62% and plywood was 38%,said APA. “This year, it’s expected to be about 56% OSB and 44% plywood. With OSB’s higher dependence on new home construction, OSB’s share of total production has declined.”

New residential construction accounted for 74% of OSB consumption in 2004, and just 40% in 2009, while “all othermarkets (including repair and remodeling, non-residential and industrial) now account for 60% of OSB use, compared with 26% in 2004, the second-quarter 2009 report noted.

In July 2009, British Columbia-based WoodMarkets group suggested in a report that the North American OSB industry, “in grave troubleas a result of the plunge in housing starts and too many OSB mills, was in need of  “drastic structural changesor the OSB sector would “remain linked to weak demand and over-capacity.”

Later in the year, in November, WoodMarkets published a five-year outlook indicating North American OSB producers were unlikely to see much in terms of demand and price improvement before 2011 and that supply dynamics would be as critical going forward as demand trends.

“The massive amount of capacity that is either curtailed or closed and is sitting on the sidelines is the major question mark in the sector’s price recovery equation,said WoodMarkets.

Launching the five-year forecast, WoodMarkets’ president Russell Taylor said: “The collapse in the US housing market completely changed the business case for new OSB mills, resulting in a glut of existing, under-construction and planned OSB capacity swamping the market as demand plummeted. This resulted in an unprecedented number of OSB mill curtailments and closures since 2006 (with the bulk in 2008 and 2009).”

Although the “stage is slowly being set for a better supply-demand balance,said Mr Taylor, “the timing of a more favourable OSB business is expected to be out to 2012 and 2013 when the full impact of a housing recovery is forecast to take hold and new and curtailed OSB capacity can be more readily absorbed.”

According to WoodMarkets, OSB accounted for less than 30% of US panel consumption in 2009. OSB demand and output shrank between 2007 and 2009 to almost half of its 2006 volume, with demand slammed by the slump in new single-family residential housing that normally accounts for 45%–55% of all US domestic plywood and OSB usage.

With structural panel demand forecast to improve as new housing starts move higher, WoodMarkets’ forecast is for OSB consumption to almost double between 2009 and 2014, but it noted that was still well below the levels achieved before the housing slump.

“Total US OSB and plywood structural panel demand is forecast to rebound steadily at a healthy average annual increase of 14%,said WoodMarkets. “Peak production volume in 2014 will be close to the level achieved back in the 2001 mini-recession and slightly below the demand levels of 1999 and 2000. So, the OSB and plywood peak demand forecast in 2014 barely achieves the levels of some 15 years ago – a sign that normal demand will likely be at much lower levels in the next decade.”

Sources: Forestweb, company and industry reports. Please note that all the tables contained in this article are the copyright of Forestweb, Inc, reproduced with their kind permission. They may not be reproduced or transmitted in any form or by any means whatsoever.

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