Tightened Particleboard Supply Challenges Industry

Recent plant closures and an explosion at a major panel manufacturer have led to board shortages and resulting price increases. Wood & Wood Products asks: How will the composite panel industry respond?

By Wade Vonasek and Andy Jenkins
Composite panels have been in short supply for various companies around the wood products industry in recent months. Factors ranging from plant closures to raw material shortages have all played a part.

Despite his positive overall attitude, Tom Julia, president of the Composite Panel Assn., concedes that his industry is going through a bit of a rough stage right now. The long and short of it is this: Supplies are down and prices are up. Julia says that the composite panel industry has seen spikes in prices and capacity issues before.



"The panel production industry, through pretty much the beginning of 2001, went through a period where excess capacity and market conditions really did not permit much in the way of price increases," Julia says. "The nature of the market was such that it overcame the normal seasonal adjustments you might have seen in prices. The result of which, you saw some retrenchment in capacity, further consolidations and a number of other things happen that started to show up in pricing in the early part of last year. And in the early part of last year, some notable price increases seemed to happen all at once."



But what has made this year's price increases different, Julia says, is the accompaniment of supply constraints.



"This year, price increases are coupled with a difficulty of even getting the board," Julia says. "The availability issue, in and of itself, I would argue is the product of the last four or five years of trends where the industry was trying to right itself - you have some capacity reduction and several difficult years of being profitable as a North American panel producer."



Along with more historical factors, recent mill closings and an explosion, causing extensive damage to Tafisa Canada's 10-foot continuous press line, have all played a part in creating composite panel shortages and resulting price increases throughout the industry.



Chris Leffel, vice president of sales and marketing for Sierra Pine, Roseville, CA, calls the closure of the Atlanta-based Georgia-Pacific plant in Gaylord, MI, "the first major shock wave that got folks scrambling in an already tightening market."


Circumstances have led some industry experts to predict that North American particleboard and MDF capacity will be down in 2006 from 2005.

Explosion KO's Tafisa Plant



Right on the heels of the GP plant closure, the April 17 explosion at Tafisa's plant in LacMagnatic, QUE, essentially made a tight market for particleboard shipments unexpectedly tighter. While, fortunately, the explosion did not result in any injuries, Eric Dedekam, vice president of sales and marketing for Tafisa, says that the plant's two panel lines have been down since the time of the explosion. Dedekam adds that there has been no definitive announcement as to the cause of the explosion. The 9-foot and 10-foot lines combine to represent 7 percent of the North American particleboard marketplace, according to Dedekam. Tafisa plans to have its 9-foot line operational by mid- to late-June and back supplying the company's melamine business. However, Tafisa's 10-foot continuous press line, which supplied particleboard to Canadian and U.S. customers, will remain down for a period of 10 to 12 months, Dedekam says.



"The decision to rebuild is being assessed as we speak, but Tafisa and its parent company, Sonae Indústria, are very committed to the North American marketplace," Dedekam says.



Dedekam adds that Tafisa is currently importing product into North America to help alleviate some of the pressure brought on by the explosion. Nearly every source that Wood & Wood Products found for this story cited the explosion at Tafisa as a major factor in the

current particleboard shortage.



"We are working very closely with customers to try and help them through. We're communicating on an on-going, proactive basis," Dedekam says. "We are doing everything in our power not to leave them in a lurch. But there is no question that customers are having a difficult time."


WWP State of Composite

Panel Industry - Survey Results

(From 196 total respondents)

Wood & Wood Products surveyed manufacturers of wood and composite kitchen and bath cabinets, residential furniture, architectural woodworking and millwork, and store and office fixtures for a sample of the state of the composite panel industry. Questions pertaining to a company's experience with the price and availability of particleboard, MDF and hardwood plywood panels over the past six months were asked.



Based on the replies received, some trends did emerge. A majority of the surveyed companies surveyed reported no problems meeting panel supply needs, but when broken down by workforce size, a majority of larger companies said that they actually were experiencing problems meeting supply needs. A large majority of companies reported price increases in supply, with the results being consistent among all company sizes. And in regards to importing, the majority is not looking beyond North America for supply, though it appeared that larger companies were more likely to do so, compared with smaller companies.

Since the beginning of 2006, has your company experienced problems meeting your particleboard, MDF and/or hardwood plywood panel supply needs?
Number of Employees
Total Surveyed
Yes
No
Companies w/1-25 employees 119 23.5% 76.5%
Companies w/26-99 employees 40 45.0% 55.0%
Companies w/100+ employees 37 54.0% 46.0%
Total 196 33.6% 66.4%
Has your company seen the price of particleboard, MDF and/or hardwood plywood significantly rise since the beginning of 2006?
Number of Employees
Total Surveyed
Yes
No
Companies w/1-25 employees 119 65.5% 34.5%
Companies w/26-99 employees 40 80.0% 20.0%
Companies w/100+ employees 37 75.6% 24.4%
Total 196 70.4% 29.6%
Has your company been forced to look beyond U.S. and Canadian sources for supplies of particleboard, MDF and/or hardwood plywood?
Number of Employees
Total Surveyed
Yes
No
Companies w/1-25 employees 119 15.9% 84.1%
Companies w/26-99 employees 40 17.5% 82.5%
Companies w/100+ employees 37 29.7% 70.3%
Total 196 18.8% 81.2%
Source: Wood & Wood Products

Challenges Ahead



Kelly Shotbolt, president and CEO of Flakeboard, Markham, ON, says that price increases have resulted from rising wood, resin and energy costs, along with what he calls "a dramatic shift in supply." Shotbolt adds that the shortages have nothing to do with an upward lift in demand, and offers up his forecast for the near future.



"With housing starts beginning their cyclical decline, demand will begin to subside over the next year or more," Shotbolt says. "The on-going mill closures are a testimony to the weak economics of our industry and even with improved pricing, mills will need to re-evaluate their commitment to the industry as additional environmental-related pressures will cause higher capital expenditures and operating costs in years to come."



With these shortages have come the inevitable problems of allocation for board manufacturers. Leffel says that all of Sierra Pine's customers are currently on allocation, citing raw material shortages as one of his company's main problems. "It is frustrating for us that we haven't yet been able to ramp up all of our plants to a 24/7 posture, which we're trying to get to as soon as possible, mainly trying to get all of the raw materials around," Leffel says.



Both Leffel and Julia say that in recent months, some of the raw material that board manufacturers require has been used for alternative purposes. With natural gas prices skyrocketing, raw materials like residual fiber and wood chips and shavings are increasingly being used as a source of boiler fuel by saw mills and others - a trend more typically found in Canada, Julia says, where environmental concerns garner different attention compared to the United States.



"It is a very isolated issue in the states," Julia says. "It would be unfair to say that it is anything like a trend in the U.S. because, honestly, this is driven by public policy, and you don't have that policy in the U.S. You have it in Canada, and especially in eastern Canada."


2005 saw declines in North American particleboard and MDF shipments, compared to shipments in 2004. Trends during the first four months of this year show that annual shipments for 2006 may decline as well.

Leffel says that with the end of a wet spring, which slowed the logging industry along the west coast, he is cautiously optimistic about raw material supplies in the near future.



"We're just now beginning to see the light at the end of the tunnel, but it's probably going to take us another couple of months before we've got the wood material flowing into our plants to support these 24/7 operations," Leffel says. "These issues aren't going to go away. We've got a short-term reprieve in terms of raw materials flowing again now because of logging, but this whole demand issue is not going to go away."



Canadian composite panel production may face some of the most difficult challenges in the months ahead, Julia says. Along with the loss of Tafisa's capacity and problems with availability and cost of raw materials, Julia says that Canadians continue to struggle with a currency exchange rate working against product exports. Shotbolt says that Flakeboard mirrors these concerns for the Canadian side of the industry.



"As a Canadian manufacturer, we have been impacted by a roller coaster of events, two of which stand out: energy and exchange rates. The most significant being the rise of the Canadian currency," Shotbolt says. "The situation became so onerous that several mills closed their facilities, first creating a short-term equilibrium in the market."



Given these challenges and the situation at Tafisa, Julia says that the CPA expects to see overall panel production in Canada down by an estimated 20 percent this year, largely due to Canadian particleboard production being down by an estimated 30 percent.



Board shortages and price increases have been a difficult reality for many companies, both inside and out of the composite panel industry. Dorel Industries Inc., Montreal, QUE, a global consumer products company headquartered in Montreal, recently singled out particleboard supplies as a factor in the company's lower-than-expected first-quarter earnings.



Kevin Sauder, president and CEO of Sauder Woodworking Co., Archbold, OH, says that he has seen particleboard prices rise by up to 40 percent in recent months. Sauder, along with a representative from a large Canadian RTA manufacturer, say that RTA companies certainly have felt the effects of stormy waters in the composite panel industry.



"Board manufacturers over-expanded their mill capacity in the late 1990s, and fortunately for the furniture manufacturers, that resulted in lower prices," Sauder says. "But that turned around as they took steps to reduce capacity. Like any commodity business, when there is more supply than demand, somebody has to decide they are going to take supply off the market, and that drives up the price. I think the domestic RTA industry, as such, has struggled."


Hardwood Plywood and Veneer Assn. President Bill Altman says the growth of hardwood plywood imports has affected his members.

Julia, in spite of concerns from various sides of the wood products industry, remains hopeful about the shortage and price crunches affecting his industry. He is expecting U.S. shipments to be slightly up this year, possibly up 1.5 percent from 2005's 5.66 million square feet (3?4-inch basis) of production. This growth, Julia says, isn't too bad considering the economy and competition from overseas.



"I do think the supply issue is a short-term phenomena. I do think it is geographic, it is product related, it is seasonal. And our expectations are that this will all stabilize before the end of the year - at least in terms of the availability of product."



For more comments about composite panel supply and price issues from around the industry, see the W&WP survey comments.



Industry Consolidation



The corporate structuring and governance of a few industry leaders has changed in recent months, as two acquisitions - the Wichita, KS-based Koch Industries' purchase of Georgia-Pacific particleboard and MDF mills and Flakeboard's purchase of Federal Way, WA-based Weyerhaeuser's composite panel business - have made front page headlines.



On December 23, 2005, Koch, purchased Georgia-Pacific for an estimated $21 billion. Only months later, the closure of GP's plant in Gaylord, MI, had the industry talking yet again. While some have seen this closure as a direct cause of current product shortages, Julia says that, in terms of the big picture, this purchase will be good for the industry.



"Closings like that are going to happen when you have a new company taking things on and deciding what is profitable and what is not. They are going to make those kinds of choices," Julia says. "The question is whether they are in this for the long haul? Are they determined to make that whole division profitable and stay in business and invest?"



The answer to those questions, as far as Julia can tell, is yes.


Survey Comments: Dealing with Particleboard and MDF Price Increases

A current challenge affecting companies around the North American wood products industry is a price increase in MDF and particleboard, which some have reported to be up 10 to 15 percent. The Wood & Wood Products survey found that some companies are feeling this squeeze more than others, and that those who are dealing with rising prices are dealing in a variety of ways. The following are just a few of the responses sent back with the surveys.

"We are looking at a third increase within the last 90 days, which has a significant impact to cost, and our prices will increase as a result. We have not experienced shortages, but cost is a major concern."

- Tom Reinbold of Marsh Furniture Company,

High Point, NC; 700 employees.

"It is affecting us now and will in the future on jobs that we have contracts based on previous, lower pricing. We cannot go back to our customer and ask for more money because of rising material prices. We are being told by our suppliers that they may have trouble keeping up supply in the later part of this year."

- Ken Kowalchuk of Cabtec Manufacturing Inc.,

Regina, Saskatchewan; 57 employees.



"We have been forced to search out new sources to meet our needs. Some of our previous vendors are on quota, and a couple have closed down their operations. Our (panel) prices have increased approximately 15 percent so far this year."

- Ralph S. Fry of Huntwood Industries,

Liberty Lake, WA; 700 employees.



"We produce S2S hardboard and have seen significant growth in business and inquiry as a result of the constriction in the particleboard and MDF markets. Particleboard plant closures and curtailment of operations have led to a market shift to more demand for hardboard."

- Timothy R. Boerst of Decorative Panels International Inc., Toledo, OH; 350 employees.



"We have seen increases, but not to the extent that I have read of others experiencing. The most significant price increase that I have seen has been in melamine. I am not totally concerned about shortages. I believe it was in 2004 when there was a lot of talk about shortages and â??allocations.' Working with our distributors, we managed to avoid any disruption during that time, and I expect we would be able to do the same should there be a problem in the second half of 2006."

- Cassy Thomeier of Griffin Interior and Fixture Inc.,

Bridgeville, PA; 80+ employees.



"We honor the price of our products for a year at a time, so the increases have had a significant impact on our bottom line, as we have had to eat the added cost. It has also affected our ability to gain new business when the higher costs of raw material are passed along to the customer."

- Amy Petersen of DRAS Cases Inc.,

Lake Mills, IA; 33 employees.



"This has had a significant impact, as most of our business is contract pricing with no opportunity to increase pricing until the end of the contract. This in turn may prompt our customer to turn overseas for pricing relief, which has happened."

- Wray Hinan of Tricore Industries,

Concord, ON; 50 employees.



"The marked increase in price has reduced profit margins and forced me to â??shop around' more than I used to in the past."

- William Zapantis of Durable Woodworks Inc.,

Miami, FL; 75 employees.



"Our bottom line has dropped about four percent. However, I will consistently purchase products produced from either Canada or the U.S. because of their superiority."

- Rick Grady of Grady Cabinets,

Gainesville, FL; 3 employees.



"In just the past two months, our prices for MDF and hardwood plywood have gone up enough for us to have to buy very large units to lock the price for the summer and pull as we need."

- Matthew Meisner of CV Carpentry Inc.,

Modesto, CA; 26 employees.



"Some product has increased 25-30 percent in the last 30 days. There is already hoarding taking place in Los Angeles."

- Michael Mueller of The Closet Guy Inc,

Beverly Hills, CA; 3 employees.



"I think everyone should be a bit concerned. We will continue to monitor the situation and try to get new suppliers on line before we experience shortages."

- Charles Menke of Peerless Woodworking,

Bluff City, TN; 50-60 employees.

"I think we've seen Koch acquiring Georgia Pacific as a very positive sign. This is a case of, the largest producer of particleboard and MDF at the time, being acquired by a company that has a track record of success," Julia says. "Who knows what they'll keep, what they'll shut down, what they'll do. But, obviously, they are committed to right-sizing the business and making it profitable. That's the good news, and I think it was absolutely a stabilizing factor for the industry."



In a second big move within the industry, earlier this month Flakeboard signed a definitive agreement with Weyerhaeuser Company to purchase its composite panel business - six MDF and particleboard mills located throughout the United States. Flakeboard, it should be noted, bought out Georgia-Pacific's share of a joint-venture particleboard plant in Bancroft, ON, in August 2005. The company says that the newest acquisition will nearly quadruple its production capacity by adding more than 1.1 billion square feet of annual panel production to the 400 million square feet already produced annually by its pre-existing mills in Canada. Barring problems with standard regulatory approval, the purchase will be finalized in the third quarter of this year.



"Flakeboard's purchase of Weyerhaeuser is a once-in-a-generation opportunity," Shotbolt says. "The Weyerhaeuser mills are modern, scale facilities with a great workforce and a superb customer base. Flakeboard's business model of vertical integration will be employed over time after we assess each site and opportunity for continued investment. While for some, Flakeboard was an unlikely suitor, I doubt there was a more committed and passionate company in our industry vying for the assets."



Julia's view of this acquisition is just as positive as his view of the GP/Koch merger: a purchase by a company with a proven record of success and a long-standing tradition of commitment to the industry. Julia says he especially likes the fact that this acquisition represents a commitment of domestic (North American) manufacturing, to domestic manufacturing. The types of consolidations that would concern Julia, he says, would be in cases of investors coming in with no particular expertise in the wood products industry, and no particular long-term commitment. In the long-term, Julia says he expects to see more and more consolidation and realignment within the composite panel industry.



What about Plywood?



"If you look at the import data, the growth of hardwood plywood imports has been pretty strong, very strong, in the last two to three years," says Hardwood Plywood and Veneer Assn. President Bill Altman. "That change in the way the market is structured certainly has impacted both customers and manufacturers one way or the other."



Altman says that although shortages of particleboard and MDF do affect his members, the impact of imported hardwood plywood is more prominently felt, with approximately 70 percent of HPVA members being made up of veneer core producers. "Generally speaking, about 30 percent of our stock panels are produced using particleboard or MDF core. Imports are not going to be as big of a factor for particleboard and MDF. It is a large market. But imports, because veneer core plywood is a lighter product, are affecting the veneer core side of the market much more.



"The larger companies have been overseas already," says Altman. "Some of them actually go overseas and work with suppliers there for a mix of both imported and domestically produced product. It's more of a factor when it comes to dealing with the larger manufacturers, probably, than it is for the small manufacturers."



Altman also ties in the variation of how products are used in different parts of the world. "In the last few years, production of veneer core hasn't grown as much as imports of plywood have grown. North America is a little unusual in that we are very heavy into veneer core, hardwood plywood. When you go to Europe, most of their panels - probably 90 percent plus - are either particleboard or MDF."

                                                                                                                                                                                           

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