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Wood-Panel Rally Seen Fizzling Amid Increasing Supply

Wood-Panel Makers ’12 Rally Not Seen Next Year
Norbord and Ainsworth, both controlled by Brookfield Asset Management Inc., have more than tripled this year in Toronto trading, posting the fourth- and second-best returns respectively among companies with market values exceeding C$200 million ($201 million), according to data compiled by Bloomberg. Photographer: Ariana Lindquist/Bloomberg

Wood-panel makers Norbord Inc. and Ainsworth Lumber Co., among the best-performing Canadian stocks this year, will probably cool in 2013 as the accelerating U.S. housing recovery entices producers to restart idled mills.

Norbord and Ainsworth, both controlled by Brookfield Asset Management Inc., have more than tripled this year in Toronto trading, posting the fourth- and second-best returns respectively among companies with market values exceeding C$200 million ($201 million), according to data compiled by Bloomberg. A slowdown of price and share increases is possible as North American producers ramp up output of oriented-strand board, a plywood substitute, according to analysts at Toronto-Dominion Bank and ERA Forest Product Research.

“There is some risk in the second half of 2013, as you see more and more of that incremental OSB production hitting the market,” David Elstone, a Gibsons, British Columbia-based analyst at ERA, said last week in an interview. “We’re still calling for exceptionally high panel prices in the first half and then a decline from there.”

Prices for OSB and other building materials have been rising since last year after they slumped as the U.S. housing market began to collapse in 2006. “Substantial” mill closings across North America since then set the stage for a recovery in lumber, Toronto-based Bank of Nova Scotia said last week.

Rising Prices

Lumber futures in Chicago have soared 55 percent in the past year because of an improving outlook for U.S. construction and predictions of increased demand in Asia. In that time, OSB prices have increased 86 percent, according to Random Lengths, a forest-industry news service.

The rebound in demand has benefited producers including Nashville, Tennessee-based Louisiana-Pacific Corp., the world’s largest OSB maker, which has more than doubled in New York trading this year as the U.S. housing market improved.

That rise looks set to continue. The number of building permits issued in the U.S. in November climbed to a four-year high, according to Commerce Department figures released Dec. 19. A proxy for future construction, permits have increased 28 percent this year, the data show.

“We do not doubt the U.S. housing recovery, but have concerns that the restart of idled capacity will disrupt market balance and keep downward pressure on OSB prices in the mid-term,” Sean Steuart, a Toronto-based analyst at TD Newcrest Inc., said in a Dec. 4 note to clients.

Boosting Output

Buoyed by fatter profit margins, Toronto-based Norbord, the second-largest North American OSB maker by active capacity, and Vancouver-based Ainsworth are taking steps to boost output, the research firm ERA said Nov. 27 in a note.

U.S. producers also are reopening shuttered capacity to make OSB, which is formed by bonding wood flakes together with wax and resin.

Louisiana-Pacific is preparing to boost output from the Peace Valley OSB mill in British Columbia in the first quarter while closely held Atlanta-based Georgia-Pacific LLC is activating an OSB factory in South Carolina, according to ERA.

Elstone estimates benchmark OSB prices will average $400 per thousand board feet in the first quarter, $385 in the second, $340 in the third and $270 in the fourth as the restarted mills ramp up their production. That compares to $345 last week.

Paul Quinn, a Vancouver-based analyst at Royal Bank of Canada’s RBC Capital Markets unit, projects $325 in the first half and $275 in the final six months.

‘Pretty Robust’

OSB markets will be “pretty robust” next year, Norbord Chief Financial Officer Robin Lampard said last week in a telephone interview.

“That’s simply predicated on our view of what it takes to get capacity back up and running,” she said from Toronto. “It’s simply not possible to ramp up quickly enough to catch up to the overall rising tide of OSB demand.”

Norbord rose 1.4 percent to C$30.65 at the close in Toronto. Ainsworth, which today announced the completion of a C$175 million rights offering, fell 2.9 percent to C$2.69.

Owners of mothballed mills will be constrained by a lack of available workers in some areas, the need to re-establish wood-gathering networks and emerging delays in acquiring parts and equipment necessary for the restarts, Lampard said.

‘Few Bumps’

Ainsworth Chief Financial Officer Rick Eng declined a request to comment on the outlook for the OSB industry and prices.

As the U.S. housing market recovers, it’s not unrealistic to expect a “few bumps in the road” as the industry returns to historical levels of activity, Andrew Kuske, a Toronto-based analyst at Credit Suisse Group AG, said in a Dec. 19 note to clients.

“We view the factors contributing to margin expansion as largely outweighing the risks associated with a renewed pace of industry restarts,” Kuske said. He raised his 12-month forecast on Norbord to C$36 from $24.

The company “continues to face positive momentum coming from the ongoing U.S. housing market recovery,” Kuske said in the note.

RBC’s Quinn says he expects the industry will be “rational” in bringing back idled capacity in 2013.

Still, he says the OSB industry’s track record for managing panel supply isn’t reassuring.

“At the top of the market in 2006, everybody added new capacity,” Quinn said last week in a telephone interview. “When the market crashed, they didn’t take down supply fast enough.”

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