North American Lumber Market

16-31th May 2006

US companies get disbursements of import duties
In 2005, the US government collected anti-dumping duties on Chinese wooden bedroom furniture imports ranging from 0.83% to 198.08%. Under the US law, the anti-dumping duties must be disbursed to companies harmed by the Chinese imports. The US Customs and Border Protection Agency has now paid to 24 US furniture manufacturing companies (all petitioners of the 2004 dumping investigation) a first instalment amounting to a total of $144,159. The disbursements ranged from $627 to $28,713, with Stanley Furniture receiving the highest amount. These payments represent only a small fraction of the total duties levied by the US government in 2005. More disbursements have been announced.

US housing market continues to slow
The US housing market continues to slow. The pace of construction of new houses slipped 7.4% in April, according to the US Census Bureau. Confidence in the housing industry is at its lowest ebb since 1995, according to the National Association of Home Builders.

Former US Federal Reserve Chairman, Alan Greenspan, said that the house boom was over and predicted that there was no danger of a total collapse of the housing market. He added that Americans’' consumption could taper off somewhat now that the US housing market’s “extraordinary boom” had ended.

OSB capacity expands amid soft price forecast
Contrary to the lacklustre MDF and plywood markets, OSB continues to be a hot product in North America, according to International Wood Markets (IWM). OSB producers benefited from the stellar North American housing demand, a high-cost competing product (plywood) and an ongoing shortage in panel supply. Strong demand and short supply led to record high prices
for OSB. Since mid-2003, OSB prices have exceeded $250 per msf (thousand square feet), peaking at over $500 in April 2004 and trading between $250 and $390 since then. In contrast, between 1996 and mid-1998 and for most of 2001 and 2002, OSB prices rarely went over $200 per msf.

In conjunction with the rising prices, OSB mills enjoy exceptionally high earnings and very liquid cash positions. On average for the last three years, the dominant producers’ financial statements show earnings before interest, tax and depreciation allowance (EBITAD) of approximately $120 per msf, representing an EBITAD margin on sales of about 35%. This
constitutes a payback period of less than three years on a modern mill.

To grow business further, most of the leading OSB players have announced new greenfield plants or expansions of existing plants. Growth by way of acquisitions is less feasible. The few firms that could potentially be for sale have a very high “sticker” price. Already in 2005, two new mills (Canfor/L-P and Georgia Pacific) were built, plus a few smaller expansions, for a total increase in capacity of almost 1.5 billion sf. Two more mills (Norbord and Marco) will start-up later in 2006 while seven new plants will add a whopping 4.6 billion sf of OSB supply in 2007. IWM forecasts that the total capacity expansion between 2006 and 2010 may be as high as 8.7 billion sf.

However, the current downturn in the housing demand will probably lead to an excessive supply of OSB toward the end of this year and this may further aggravate in 2007. The continued retrenchment of plywood capacity will mitigate this situation only moderately. Under this
scenario, it is likely that several of the announced OSB expansion projects will be delayed or cancelled. Due to the build-up of excessive supplies, OSB prices will undoubtedly become softer in the years to come. While OSB prices in 2006 will likely remain above the $260 per
msf level, the forecast for 2007 is more pessimistic at about $200. The declining prices will coincide with the threat of higher energy, resin and fibre costs, thereby squeezing the mills’ profitability. 

In order to reduce its reliance on commodity-like structural panels for the housing industry, many OSB producers are directing some of the new and existing capacity away from the crowded market of basic sheathing panels towards more innovative specialty products with higher profit margins. Examples include siding products, Oriented Strand Lumber (OSL), flooring
panels, rim boards, moisture-resistant panels and similar products.

Chinese furniture imports undercut MDF demand
North American MDF capacity remained virtually unchanged during the past two years. Only 2.3% growth was reported in 2005 over 2004 (5.4 million m3 versus 5.3 million m3). Also, numerous proposed agri-fibre projects did not materialize. In contrast, the expansion pace this year is much faster. Three new MDF projects for the US South (two emphasizing laminated flooring) are scheduled to come on-stream along with a few modifications to existing plants. With these expansions, North American capacity is forecast to surge 20% to 6.5 million m3 in 2006.

The US MDF industry is in a difficult transition phase. Growing imports of MDF from China represent a dark cloud looming over the industry in 2006 and beyond. Furthermore, skyrocketing imports of foreign produced furniture are decimating the US furniture industry and its absorption of wooden raw materials, including MDF. The largest MDF producer in 2005, Weyerhaeuser, has
announced plans to divest itself of both MDF and particleboard. It appears that Sierra Pine will acquire several of Weyerhaeuser’s mills, thereby becoming the largest MDF producer in North America.

Abbreviations

LM        Loyale Merchant, a grade of log parcel	Cu.m         Cubic Metre
QS         Qualite Superieure	Koku         0.278 Cu.m or 120BF
CI          Choix Industriel	FFR            French Franc
CE         Choix Economique	SQ              Sawmill Quality
CS         Choix Supplimentaire	SSQ            Select Sawmill Quality
FOB      Free-on-Board	FAS            Sawnwood Grade First and
KD        Kiln Dry	Second
AD        Air Dry	WBP           Water and Boil Proof
Boule    A Log Sawn Through and Through	MR              Moisture Resistant
the boards from one log are bundled	pc         per piece
together	ea                each
BB/CC  Grade B faced and Grade C backed	MBF           1000 Board Feet
Plywood	MDF           Medium Density Fibreboard
BF         Board Foot	F.CFA         CFA Franc
Sq.Ft     Square Foot	Price has moved up or down