16 | Focus on OSB: North America


Above: New home with OSB walls and roofing PHOTO: APA


Performance of Publicly-traded companies Production Volume (m3 Louisiana Pacific (LPX) West Fraser (WFG) Weyerhaeuser (WY)


* 1000)


Total Public Co. Production TOTAL N.A. Production


Public Co. Production Share


Sales Return (USD per m3 Louisiana Pacific (LPX)


West Fraser (WFG) Weyerhaeuser (WY) Total Public


Sales (USD in mm)


Louisiana Pacific (LPX) West Fraser (WFG) Weyerhaeuser (WY) Total Public


EBITDA (USD in mm) Louisiana Pacific (LPX)


West Fraser (WFG) Weyerhaeuser (WY) Total Public


)


2020


2021


3,134 3,257 5,121 5,407 2,616 2,412 10,871 20,342 53.4%


2020 2021


$390 $733 $378


$677


$387 $763 $384


2020 $712 2021


1,221 2,387 1,937 3,661 1,013 1,840 $4,171


2020 2021 $1,788


519 1,531 803 2,063 466 1,292 $4,886


Source(s): SEC filings, APA - The Engineered Wood Assoc., Author estimates for WFG for 2021 and 2022


2022 3,315


11,076 21,079 52.5%


5,315 2,525 11,155 20,861 53.5%


2022 $622


$565 $625 $596


2022 2,062


3,004 1,578


$7,888 $6,644


2022 1,034


1,457 879


$3,370


Note: EBITDA is a cash flow measurement not defined by accounting rules, and different companies may have different definitions


In an effort to reverse unexpectedly high inflation, the Federal Reserve Bank raised the reference interest rate by 4.25% during 2022. Mortgage interest rates doubled from about 3% at the beginning of the year to more than 6% at the end of 2022. The combination of higher mortgage rates and recent house price increases reduced North American housing affordability, residential construction, and OSB usage in the second half of 2022. For three publicly-traded forest products manufacturers (Louisiana Pacific, West Fraser, Weyerhaeuser), 2022 financial results for their OSB divisions mirrored the declining demand and falling prices. Fourth quarter 2022 net sales and average product prices for OSB fell by 60% and dollar profits declined by 90% compared to Q1 2022. The economic case for more OSB manufacturing capacity has weakened, but significant additional capacity is scheduled to come online before early 2024. While Huber cancelled its planned greenfield facility, Roy O Martin and West Fraser are each scheduled to open a modern new mill within the next year. Additionally, Tolko continues to rebuild the High Prairie mill in Alberta destroyed by fire in May, 2022. Dieffenbacher is supplying the core components for the project, which is expected to be complete by the end of 2023 and will see the facility have a production capacity of 734,000m3


of OSB per year.


Given expectations for weak housing starts plus additional capacity starting up, it’s unlikely that OSB prices will soon return to the lucrative levels of mid-2020 through mid-2022. Medium-term industry profitability will reflect the mediocre prices.


DECLINING HOUSING AFFORDABILITY REVERSES MOMENTUM A collateral consequence of recent high inflation is that the Federal Reserve Bank and the Bank of Canada (as well as most other central banks) substantially raised reference interest rates. The Federal Funds Target Rate and the Canadian Target Overnight Rate both rose from 0.00% in January 2022 to 4.25% in December. Mortgage interest rates have trended upward as reference rates increased. A US homeowner conventionally purchases a dwelling with a 30-year fixed rate mortgage that requires a 20% down payment. In Q4, 2019 immediately prior to the pandemic, the government owned secondary mortgage bank Freddie Mac calculated the average 30-year fixed rate mortgage at about 3.7%. The mortgage rate average fell to 2.7% by the end of 2020 as the Fed increased money supply during the initial pandemic panic; those lower rates stimulated purchases of new and existing houses.


WBPI | April/May 2023 | www.wbpionline.com


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