Particleboard and MDF Will Supply Issues Persist? North American Conference October 2017 Steven Honeyman Economist, Wood Products
Overview Markets have been steady thus far in 2017 for North American particleboard and MDF producers What will drive growth in the future? Imports and their effect on particleboard and MDF markets Are domestic producers losing market share to imports? The furniture market is rebounding Will this benefit domestic particleboard and MDF producers? New capacity will be coming on line Will there be enough demand to absorb the additional capacity? Costs and profitability Will market conditions improve profitability for domestic producers? 2 2
New Capacity Particleboard Arauco NA Grayling, MI (424 MMSF, 2018) Kronospan Eastaboga, AL ($362 million expansion, 2018) Egger Group Lexington, NC ($700 million, 2019) MDF Swiss Krono Barnwell, SC (170 MMSF, 2018) Cal Ag Willows, CA (140 MMSF, 2018) Furniture Ashley Furniture Arcadia, WI (500,000 sq. ft. expansion) La Z Boy Dayton, TN ($26 million expansion) 3 3
North American Particleboard: Forecast Summary Demand Demand for particleboard produced in the USA and Canada will increase in 2017 and accelerate in 2018 2019, driven by growth in housing starts and a strong furniture market. Capacity Particleboard capacity in the USA and Canada will grow as a new mill begins operating in 2018 2019. D/C Ratio Prices Demand/Capacity will approach the 85% level by 2019. New capacity in 2019 will require operational capacity to be managed. Prices will trend slightly higher as growing demand allows producers to pass along cost increases. 4 4
US Particleboard Consumption: Furniture Production Drives Growth BSF, ¾ inch Basis 6 5 4 3 2 Furniture R&R Nonres. Const. Residential Other Industrial 1 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 5 5
North American Particleboard: Residential Construction Becoming More Significant 6 Other BSF, ¾ inch Basis 5 4 3 2 35% Res. Const. Furniture 39% 1 52% 44% 0 2005 2010 2016 2017 2018 2019 6 6
North American Particleboard Consumption Will Continue to Exceed MDF/HDF BSF, ¾ Inch Basis 7.0 Particleboard 6.0 MDF 5.0 4.0 3.0 2.0 1.0 0.0 00 02 04 06 08 10 12 14 16 18 7 7
North American MDF: Forecast Summary Demand Demand for MDF produced in the USA and Canada will grow in 2017 2019, driven by growth in housing starts, repairs and remodeling, and furniture production. Capacity MDF capacity in the USA and Canada will grow as new capacity comes on line in 2018 2019. D/C Ratio Demand/Capacity will increase over the coming years as demand grows; however, imports pose a risk to producers. Prices Prices will increase modestly as costs push prices higher. Competition from imports will continue to limit producer pricing power. 8 8
US MDF Consumption: Residential Uses Driving Growth BSF, ¾ inch Basis 3.5 3.0 2.5 2.0 1.5 1.0 Furniture R&R Residential Other Industrial 0.5 0.0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 9 9
Residential Construction Driving North American MDF Growth 4.0 3.5 3.0 Other Res. Const. Furniture BSF, ¾ Inch 2.5 2.0 1.5 53% 54% 1.0 0.5 0.0 39% 38% 2005 2010 2016 2017 2018 2019 10 10
Sources of North American Particleboard and MDF/HDF The North American particleboard markets are primarily supplied by US and Canadian manufacturers Imports are a very small amount of total supply Just 5.7% in 2016 (209 MMSF) The import share is unlikely to climb significantly, barring a domestic price jump 11 11
Sources of North American Particleboard and MDF/HDF In contrast, MDF/HDF imports are extremely significant In 2016, MDF/HDF imports (panels, moldings and flooring) were 1.08 BSF Representing 33% of total supply With new capacity forthcoming, it is unlikely that the import share will increase significantly 12 12
US MDF Imports: July 2017 MMSF, 3/4 Inch Basis 2016 Total 2017 YTD 2016 YTD % Change Canada 453 255 277 8% China 291 158 171 7% Chile 231 145 123 18% Other Europe 135 152 79 93% Germany 91 72 49 47% Brazil 50 43 24 74% Oceania 9 3 6 46% All Others 37 35 20 76% Total 1,334 903 763 18% 13 13
North American Offshore* MDF Imports Will Set New Historical High Particleboard imports approach highest level of decade 1.4 1.2 Particleboard MDF BSF, ¾ Inch Basis 1.0 0.8 0.6 0.4 0.2 0.0 00 02 04 06 08 10 12 14 16 18 * Note: Offshore includes Mexico 14 14
Trends in the US Furniture Industry US furniture industry has been growing Imports have been growing faster than production US furniture producers are losing market share to imports US furniture imports passed their previous peaks in 2014 Have continued to grow in each subsequent year Meanwhile, US furniture production in 2016 was 19% below its 2005 peak Annual Percent Change US Furniture Production US Furniture Imports 2013 0.80% 7% 2014 0.50% 7% 2015 4.50% 11% 2016 0.10% 4% 2017 (July YTD) 0.10% 10% 15 15
US Wood Furniture Imports Continue to Grow Billion 2015$ 22 20 18 16 14 12 10 8 6 4 2 0 China Vietnam Canada Europe Americas Other Asia All Others 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 16 16
US Wood Furniture Imports: July 2017 Million US Dollars (2016) 2017 YTD 2016 YTD % Change China 6,305 2,356 10% Vietnam 2,356 1,961 20% Canada 1,005 973 3% Mexico 678 611 11% Malaysia 443 416 6% Italy 392 398 1% Indonesia 356 351 1% Poland 195 170 15% India 153 139 10% Taiwan 105 87 21% Germany 87 94 7% Brazil 87 71 32% Thailand 74 75 1% All Others 559 496 13% Total 12,796 11,588 10% 17 17
US Furniture Production: Crash Followed by (Muted) Recovery 120 2007 = 100 100 +27% 80 60 40 20 0 2005 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 18 18
Canadian Furniture Production: Bottomed Later Than USA, Similar Recovery 140 120 100 80 60 40 20 2007 = 100 +25% 0 2001 2012 2013 2014 2015 2016 2017 2018 2019 19 19
Mexican MDF s Effect on North American Markets Total new capacity will be 680,000 m 3 (390 MMSF) Given the added Mexican MDF capacity and estimates of Mexican MDF consumption, we forecast that US exports to Mexico may be displaced We also believe that the new capacity will not be enough to flood the US market Will increased Mexican MDF capacity lead to more MDF furniture production? 20 20
US MDF Exports and Imports to Mexico 140 1,400 120 1,200 MMSF, 3/4 Inch Basis 100 80 60 40 20 Exports Imports Furniture Imports 1,000 800 600 400 200 Million $2016 0 2010 2011 2012 2013 2014 2015 2016 2017* 0 *2016 data annualized 21 21
North American Particleboard Markets Tighten Operational capacity still well below nameplate levels 8 7 6 Capacity Demand BSF, ¾ Inch 5 4 3 2 1 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 22 22
New Capacity Increases Nameplate Levels Operational capacity will need to be more actively managed 8 7 6 Nameplate Capacity BSF, ¾ Inch 5 4 3 2 1 0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 23 23
North American MDF Markets Tighten Demand on North American mills will increase over the forecast 4.0 3.5 3.0 Capacity Demand on NA Mills BSF, ¾ Inch 2.5 2.0 1.5 1.0 0.5 0.0 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 24 24
New Capacity Will Come on Line as Operational Capacity Approach Nameplate Levels BSF, ¾ Inch 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 Nameplate Capacity Demand 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 25 25
North American D/C Ratios Will Improve Through Forecast 95% 90% 85% 80% 75% 70% 65% 60% 55% Particleboard MDF 50% 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 26 26
Rising Input Costs Squeezing Margins Increasing wood and resin costs are driving the increase $/MSF, ¾ Inch Basis 500 450 400 350 300 250 200 Particleboard MDF Total Costs, US South 150 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 27 27
Particleboard Profitability Improving Lagging in the West Mill Realization/Average Total Cost 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 US East Full cost breakeven US West 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 28 28
MDF Profitability Historically High Will remain elevated in near future Mill Realization/Avg. Total Cost 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80 US East US West Full cost breakeven 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 29 29
Conclusions Demand will grow over the forecast Moderate increases in PB and MDF consumption in 2017, which will accelerate in 2018 2019 Driven by strong furniture market and residential construction Increasing demand/capacity ratios New capacity coming on line toward the end of the forecast will require active operational capacity management Small profitability improvements in the coming years Strong US dollar and added capacity will limit producers ability to increase prices despite growing demand 30 30
Thank you! For more information: Particleboard and MDF Commentary www.risi.com/pbandmdfcommentary Wood Panels 5 Year Forecast www.risi.com/woodpanel5year 31