OSB Prices and Industry Consolidation
Purchasers of OSB remain many, but
the number of major suppliers in the OSB market has been shrinking
steadily.
by David Damery
The recent tripling of OSB prices and their
reluctance to fall from recent highs is due, in part, to a changing
industry structure in the production of OSB. Some markets,
dimension lumber is one, more closely resemble the purely
competitive ideal. This type of market has many buyers and many
suppliers and no one is big enough to set a high price and get away
with it. If the price of 2x4s from your regular supplier sounds a
bit too high, you get on the phone and call around. In these
competitive markets it is the total demand of all buyers and total
supply from all sellers that determines the current market price for
the product.
This whole story can change when the number of
suppliers shrinks, or when a single buyer gets so large that they
can negotiate a better price. Purchasers of OSB remain many, but
the number of major suppliers in the OSB market has been shrinking
steadily. Mergers and acquisitions have shrunk the number of OSB
producers significantly over the last four years. In 1999 there
were 63 OSB mills in the US and Canada. The top 5 producers owned
38 of these mills and accounted for 56% of the market share. In
November 1999 the #2 producer, Weyerhaueser, acquired MacMillan
Bloedel, picking up 3 mills in the deal. In 2002 Weyerhaueser added
another OSB mill in its $8 Billion acquisition of Willamette
Industries. The result was that Weyerhaeuser consolidated its
position with a 17% North American market share. Meanwhile,
Louisiana Pacific, the leading OSB producer, expanded its production
capabilities by over a billion square feet through its 1999 purchase
of Quebec based Forex. LP’s market share increased from 20% to 27%
over the last 3 years. So the top 2 firms now control 44% of the
market and the top 5 account for about 70%.
This consolidation trend is likely to continue
as each new wave of OSB plants that come on-line are more vast and
technologically sophisticated than the last. The leaders are
focusing on “low cost production” which, in this industry, means big
plants. New OSB mills coming on line are huge, producing
700-million+ sq.ft. each year. The size of a new plant
So what does this mean for prices? An
oligopoly has few producers but many buyers. When industry
production capacity exceeds demand, OSB pricing resembles a
competitive market. The few producers will compete with each other
for business in order to keep their enormous, expensive,
manufacturing plants producing 24/7. They take on a role known as a
“price taker” and compete fiercely for customers. This tends to
drive prices down toward their production costs, which is great for
contractors but leaves little room for profit to the manufacturer.
This is how the OSB market has behaved through much of 2001 and
2002.
However, when demand approaches capacity the way prices are set
often switches in industries that resemble an oligopoly. The
manufacturers now become “price setters” as buyers compete for
available production capacity. Buyers become desperate and often
settle for the prices set by the manufacturer just to secure
delivery of product.
Demand can rise to the level of capacity in two
ways. Buyers can suddenly all decide to place orders at once,
(wholesalers, retailers, builders, even the Dept. of Defense for
Iraq rebuilding, for example!), or production capacity can be
reduced at the manufacturer’s level. Capacity reductions can happen
voluntarily, such as scheduled plant maintenance/upgrades or
involuntarily through accidents, fire, or raw material supply
interruptions. The danger in a consolidating industry, with
ever-larger new plants, is that a single large producer, knowingly
or un-knowingly, has a greater ability to impact the market, and
drive prices up, with a slow-down in production.
At the start of 2003 many buyers, at the
wholesaler and retailer levels, were unwilling to “stock-up” on
lumber and panel products. They thought, along with everyone else,
that interest rates would be rising and that would put the brakes on
the red-hot construction pace. OSB producers slacked off their
production too. The forecast rise in interest prices never
materialized and the construction industry continued its boom
through the second and third quarters of 2003. For the first time
in years we had buyers wanting more than the manufacturers could
produce. From May to October this year wholesale prices on the
benchmark 7/16” North Central OSB jumped from $197 to $465, an
increase of 136%!
Given the chance to make up for lost profits,
oligopoly producers are reluctant to drop prices as quickly as they
have run up. With the industry structure the way it is today, as
long as demand remains close to capacity prices will remain “sticky”
at their higher levels. However, its unlikely that high prices will
stay with us for too much longer. Three things are working against
that; new capacity, imports, and product substitution. When a
single new large OSB plant starts up, it can have a near
instantaneous impact on overall industry capacity. Several new
plants are expected to come on line in the next two years.
Secondly, our world continues to shrink and we’re seeing a growing
level of imported panel products, plywood from Brazil is an
example. Lastly, builders have a choice of sheathing products, and
when the price of what they are currently using (OSB) passes that of
an alternative (plywood), they won’t hesitate to switch. Each of
these forces helps keep the producers honest.
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