The recent price spike in the OSB markets has been blamed on the greedy, sinister and evil OSB mills. (See Pricing by OSB Mills Is Opportunistic, June 8.) The following analysis explains why the price spike had a lot more to do with building material dealers' actions then any recent actions by the OSB mills.
This spring we witnessed a good old fashioned short squeeze in the OSB markets. Short squeezes have been going on for hundreds of years; however, they are usually found in either the stock markets or commodity markets. A routine OSB market rally was transformed into a very unusual price spike as dealers whom were short the OSB market scrambled to cover their positions.
The OSB rally began with a little extra demand for panel products from Haiti and Chile. Sure, there were some supply issues with log shortages, truck shortages and rail shortages, but these issues usually only move the market a few points.
The rally continued as dealers purchased OSB for a seasonal replenishment of very low inventories. For years now, bankers, board of directors and CFOs have pushed dealers to lower inventories to align with the new sales reality. As the inventory investment in dollars is reduced, it is always easier to reduce "A" items (i.e. OSB products) than either "D" or "X" items. The result is a 40% reduction in inventory dollars, which almost always results in a larger percentage drop in commodity items.
The rally was extended as the ramifications of greater housing starts (for the first time in five years housing starts actually increased during the first quarter) changed the supply/demand dynamics for OSB and reversed a five-year trend. Dealers were now looking at more and more instead of less and less.
Throughout the country, dealer salesmen eagerly reported to their managers new sales and new commitments from their builder customers. This usual great news was met with the harsh reality that a portion of this business was not covered by either current inventory or current purchase orders. The resulting short-term short position is not unusual in our business and is often a good thing. However, when orders are booked using two-week old pricing and the market is moving 10% a week; then the short strategy can lead to red ink--fast. Those dealers that choose to cover these shorts did so by buying more OSB and continuing the rally.
The final leg of the price spike was fueled by dealers who were short the OSB market and were squeezed the hardest. Late last year and early this year a number of dealers offered fixed-price contracts to builders for their lumber and panel requirements. These contracts were three-month, six-month or even annual and often were not tied to a fixed volume. Contract prices were based on year-end costs and margins were probably not in line with risks.
These dealers clearly were offering a service that added value for the builder and locked up business in a ferociously competitive environment. That's a great marketing plan as long as prices either fell or stayed the same. As the OSB rally continued, these contracts fell deeper and deeper in the red. Some of these dealers threw in the towel and covered their position or covered whatever their credit limits would allow them to cover.
Markets stop going up due to lack of buying rather than too much selling. By the beginning of May, everyone in the OSB market that either needed to buy or still had the credit lines available to buy had made their purchases. Dealer inventories were beefed up, dealer short-term short positions were covered, and anyone with long-term fixed price contracts had addressed their problem. As OSB prices dropped precipitously, the options to transfer inventories among yards, purchase trucks instead of cars, or buy units instead of trucks became economical and just reinforced the price drop.
Throughout the OSB price spike of up $200/m and down $200/m, everyone had a story(s) why. Many people thought the greedy mills were to blame, but the real reasons lay more with the condition of the housing market over the last five years, decreased panel product production over the last five years, and dealers' actions.
Floyd Fishleigh is an outside sales representative at Mentor (Ohio) Lumber.