New York, NY, May 24--Although wood panel prices have started to retreat from record highs, industry executives and analysts are shrugging off recent housing data and expectations of higher interest rates, saying they expect prices for the building materials to stay high.
U.S. housing starts fell 2.1% in April, and interest rates are widely expected to rise later this year. And while wood panel prices have fallen nearly 20% in recent weeks, they should remain well above historical levels through the fall, experts said.
"Everything we see suggests that demand is very high, supply is up very modestly and there is no new capacity of any consequence coming on until much later this year," Louisiana-Pacific Corp. Chief Executive Mark Suwyn said in an interview.
"History and the dynamics in the marketplace would suggest that prices will probably rise (again)...so I suspect we probably haven't seen the peak for this year yet," said Suwyn.
Prices for oriented strand board (OSB) and plywood skyrocketed in 2003 and early 2004 on surging demand from housing construction and decreased plywood capacity. The rise boosted profits at forest products companies like Louisiana-Pacific, Georgia-Pacific Corp. and Weyerhaeuser Co. for three straight quarters.
OSB, a structural panel made from wood chips and glue primarily used in construction, saw the most exaggerated surge, reaching $520 per thousand square feet (msf) in the benchmark grade, up from about $200/msf a year earlier. However, the price has dropped more than 15 percent since mid-April, with OSB selling for about $430/msf.
Prices have eased in recent weeks, but Oppenheimer & Co. analyst Joshua Zaret noted current prices are still well above last year's and are enormously profitable for producers.
"The housing starts we've seen have not really fallen in any meaningful way. The numbers are still very, very strong. And there's no major new capacity entering the market. In my model I have the (prices) coming down just because they are so ridiculously high," Zaret said.
Plus, prices should be expected to stay strong through the summer as we enter the heart of the building season, said Deutsche Bank analyst Mark Wilde.
"Seasonally, it's pretty hard to see why these prices would crater or correct real sharply before the fall," Wilde said. "Unless the housing market falls off a cliff, at least the next couple of quarters should be very good."
From a long-term perspective, both analysts and executives believe that prices should return to more normal levels as supply broadens and demand slows.
"These are commodities, so at some point in time (prices) will normalize," said Louisiana-Pacific's Suwyn. "What I can't predict is when."
Nevertheless, forest products companies should expect to benefit from strong panel prices for at least the next two quarters.
"There's just tremendous pent up demand out there," Georgia-Pacific CEO A.D. "Pete" Correll said at an analyst conference. "We would anticipate a very strong summer and fall in the industry. The question is how long can it last?"
