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Bank of America
Industry Research
Chuck S. Slaybaugh, Analyst
WOOD & BUILDING PRODUCTS QUARTERLY
July 2002
Executive Summary
As we worried in March, overproduction reversed pricing momentum in lumber, structural panel and particleboard markets in April, which dashed a fine Spring rally and ushered in what promises to be another disappointing year. Producers' ability to maintain prices has been further undermined by rising imports that effectively heighten the degree of industry fragmentation in most markets. Moreover, engineered and composite wood products are increasingly competing with hardwood and softwood lumber, which is beginning to tighten the building products spectrum in a pattern reminiscent of one that re-shaped the packaging sector.
Housing remains remarkably-strong, with the upturn now in its 5th year and home
sales volume expected to set another record. A depressed stock market and a gradual economic recovery suggest that interest rate hikes are unlikely this year, which should prolong record
consumption in many grades. Recent easing of the U.S. Dollar against the Canadian and EU currencies provides hope that further import penetration will also lessen. Moreover, a 27% duty on most Canadian softwood lumber, which has been collected since May 22nd, may prompt some northern producers to rethink dumping practices that have pummeled prices. With imports now taking half of new softwood lumber demand, foreign discipline will be crucial if price recovery is to resume in earnest. Elsewhere, gypsum wallboard and MDF markets are benefiting from strong demand and better pricing, while excess structural panel capacity continues to depress prices.
Despite thin profits, equities have held up relative to the broader market. Non-strategic assets sales have been few, though numerous properties are for sale. Many will likely close, though their remaining life span is unclear. Having lost much of its perceived strategic advantage, perhaps 4-5 million acres of timberland is also available, though TIMOs are attracting few new equity investors. With the purchasing wherewithal of these preferred buyers limited, more sales to governments, environmental groups and developers are likely. The siphoning of debt and equity capital will likely continue until the manufacturing component of the industry is at least 8%-10% smaller than its current size. Remaining assets should run more efficiently and enjoy better unit margins. Players may elect to take charge of their destinies by merging or narrowing their business focus or take their chances that capital partners will be patient, faithful, naive and understanding, as they have been in the textile, furniture and telecommunications industries.
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