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. 

Last updated: November 28, 2007