Between surprisingly strong housing activity and an ill-timed supply shutdown, the oriented strand board (or OSB) market is booming, with prices blowing through past peak levels around $450/msf and smashing the old 2004 housing boom pricing records. As the second-largest manufacturer of OSB, that’s good news for Louisiana-Pacific (LPX) shareholders, as the company is going to reap a surge in profits and cash flows.
The downside is that the booms never last. The price spike has been driven in large part by capacity reductions tied to COVID-19 (though some structural/cyclical shutdowns prior to COVID-19 played a role) at a time when building activity has stayed surprisingly strong and renovation/repair work has surged. Producers like Norbord (OSB), LP, Georgia Pacific, and Weyerhaeuser (WY) are scrambling to reactivate capacity to serve this demand, but the high prices won’t last. They never last.
I’m bullish on residential housing through 2021 and capacity additions in the OSB sector have been relatively restrained in recent years. That could leave a little gas in the tank for further share price appreciation, but I think anybody considering the shares ought to have an exit strategy in mind, as a look at a long-term chart will tell you that the cyclical corrections here have been pretty ferocious.
A New High For OSB Prices
OSB prices have been on a tear, rising from around $270/msf in the second quarter to around $650/msf early in September to over $700 more recently. At those late September prices, OSB has topped its former peak prices by around 50%, and that is going to drive sharply higher realizations for LP and other OSB producers, as LP was already back to 90% of available capacity at the end of the second quarter.
The spike hasn’t occurred in a vacuum. Recent house starts have