The Depressed Housing Market: How Long Can Building Products Companies Hold On?

Implications: Who among all the participants will survive the continuing slow housing market?  In this integrated industry, the pain from declining revenues and profits in the red span the gamut of participants, from builders down to wood cutters in the forest?  Is anyone exempt?  Who is positioned to survive?  Wood panel manufacturers (mostly OSB) are especially vulnerable, as prices are one fourth of what they were three years ago.  Who among the North American producers is best positioned to withstand a lengthy down cycle?  Who is most vulnerable? How do depressed wood product prices affect building products distributors?  Do low prices help a builder's bottom line? Since wood panels are commodities, shouldn't producers understand the nature of up and down cycles, i.e., good times and bad, and prepare for them?

Analysis:  

The depressed home building market, currently characterized by large inventories of both new and used homes and minimal issuance of new building permits, is into its second year. The good times experienced over an unusually lengthy 4-year cycle seem very far behind us. When will there be that positive light at the end of this dark tunnel that continues to lengthen?

In April, #2 home builder D. R. Horton announced a 37 percent drop in the number of new homes sold in the first quarter. Other large builders, including Lennar, Centex, Toll Brothers and Hovnanian, announced similar declines. Smaller home builders weren’t exempt from the bad times, as their experiences mirrored the others. Separately but directly linked, both large and small manufacturers of building products, including LP, Norbord and Weyerhaeuser, announced drastic declines in both revenues and profits. Those forest products companies largely dependent on the health of the housing market with their strong wood products offerings were especially hurt.

Early on, as home building slowed and distributors trimmed inventories, the almost overnight drop in demand, coupled with an impending increase in supply (in the OSB panel segment), caused wood panel prices to drop precipitously. In March of this year, OSB was being sold in the northern US for $138 per thousand square feet (roughly 32 4’x 8’ panels of 7/16” sheathing) versus more than double that a year earlier. At the height of wood panel demand in March, 2004, OSB prices were at a record $498 for the same product!! Since the beginning of this year, OSB and plywood prices have ebbed and flowed within a narrow range but have not improved very much at all.

As demand waned, panel producers fought to retain market share. Companies with old, higher-cost facilities were forced to drop prices to retain their business. Some did for a while and chose to operate at a loss, hoping prices would improve in the near term. They didn’t! Understanding the rules of basic economics, panel producers attempted to reduce supply by idling older facilities. But as the low prices continued, some were forced to announce permanent closures. Several manufacturers who were building new plants or expanding older ones delayed construction or even canceled it outright. Net, net, these actions served to buoy market prices…but only fractionally. At the present time, prices in the northern region have “stabilized” around $150 per MSF. However, this is still below the variable operating costs to run those older plants in the north. Is more action on the producers’ part necessary to help improve prices? It certainly is! And as long as the housing market continues in its current state, the wood products manufacturers must take action to fine tune their operations to be ready for the change that will be coming…whenever that is.