GP strengthens position as major plywood panel producer

Implications: Plywood prices remain high in spite of depressed housing market.  GP's purchase of IP plants will help to strengthen those levels.  However, it will not affect its market position nor prestige as a major paper products manufacturer. 

Analysis: GP's successful bid for all five of IP's plywood plants was chancy but may prove to be brilliant.  In adding to its already large market position as the largest plywood producer in the world, it is currently taking advantage of an unprecedented price spread over its major competitor, OSB.  In a "normal" housing market where operating rates for plywood and OSB facilities are between 88 and 92%, the spread between plywood panels and comparable OSB panels varies between $60 and $100 per thousand square feet.  However, the current spread is an unbelievable $160 to $200 per msf., even though we continue to be in the trough of a home building market with little signs of strengthening.  So was GP's strategy to add to its already dominant position one of pure luck, or was it a stroke of brilliance?  Perhaps the major cause of the recent strength of plywood panel prices has been the departure of Brazilian plywood, as most manufacturers there felt the sting of lower US prices, an 8% duty and (mostly) an unfavorable currency exchange rate as the US housing market turned south.  In addition, Canadian producers exporting to the US were having their own problems with wood supply, trade talks (carrying over from lumber) and rail transportation strikes.  That opened the door for major US suppliers like GP to capatilize.  With a huge market share and virtually no competition from other multiplant operations in the US, GP can opt to dig in its heels by quoting higher prices and lengthening delivery dates.  These practices tend to give the purchasing agents at their distributors a sense of anxiety, prompting buys at higher prices.  With very little inventory at the distribution centers and lumber yards (and with hurricane season approaching), buyers will opt to pay higher prices for fear they'll be left behind as their competitors snap up available inventory.  All of this will help maintain higher price levels for plywood, and higher revenues for GP.
   Will GP's prestige as a major producer of paper products be augmented with their purchase of IP's plywood plants, I have my doubts.  Both businesses at GP, wood and paper, are operated as separate profit centers/business units.  Also, the distributors of wood products buying GP's plywood are different than those converters and merchant distributors buying their paper products.  Thus, I don't see any carryover benefits to GP as a whole.
   In summary, GP's expansion and quasi-monopolization of the plywood segment of the structural panel industry may prove a brilliant strategy should plywood prices and spread (with OSB) hold.  If things start to deteriorate and prices fall, GP can be left holding the bag with 25 old, high cost plants and a product that will continue to be replaced by OSB over time.