50% of North American OSB capacity closed

The extreme weakness in the U.S. housing industry has created a huge over-supply of OSB capacity with no other options or markets to pursue. This has led to below cost prices for much of 2009. Russell Taylor, President of WOOD Markets says that OSB prices and earnings will be the weakest of all the commodity wood products sectors over the next two to three years, given the current state of the housing industry and OSB capacity.The inventory of unsold houses and the fallout from foreclosures and housing prices in the U.S. will be the key drivers of the recovery in new-house construction - as well as in OSB (and plywood) consumption - in 2010. However, there remains some uncertainty if the housing market recovery will occur in the second half of 2009 or whether it could be delayed until early 2010, as a number of factors must be resolved before a sustained recovery can occur.

New OSB capacity following the peak in 2004-2005 started coming on-stream just as the housing market was beginning its worst collapse since the Great Depression. “Between 2006 and the first quarter of 2009, OSB closures and indefinite curtailments have totalled a whopping 25 mills,” explained Russell Taylor. This means that about 50% of North America’s OSB capacity had closed permanently or indefinitely by the middle of 2009 as compared to the peak industry capacity in 2008. The greatest burden of these closures has occurred in Canada at 14 mills.

The severe oversupply of OSB has caused prices to remain at or below cash costs for much of the last 12 months. The strong Canadian dollar and higher transportation costs to market are two of the main reasons higher-cost Canadian OSB mills account for some 70% of the OSB curtailments and closures to date. Still, not enough capacity has yet been closed to allow for a better supply/demand balance.

OSB is certainly near its low point in this cycle on both production and price levels, but in the demand cycle for structural panels, it continues to be a long way off before any longer-term balance with supply can be achieved - given that producers have up to two dozen OSB mills waiting to be put back online!

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Issued by:  International Forest Industries

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Issue date: August 17, 2009

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