What goes up may not come down

This week, we published an expert overview of engineered wood products, including oriented strand board. OSB is a cheaper and more sustainable alternative to plywood that is equally strong and durable in most respects. It is seemingly as popular with homebuilders and remodelers as it is with the expert professors we interviewed, but what about the economics of OSB?

News reports on rising lumber prices in recent weeks have mainly focused on the fact that new demand is outstripping supply. OSB manufacturers have yet to crank up the production lines they closed when the construction industry ground to a halt. However, there may be other factors involved, and remodelers shouldn't hold their breath for prices to return to 2009 levels. They may be waiting a long time, and current pricing may be a correction for artificially low prices rather than a temporarily high valuation.

Prices Rising Fast

Random Lengths, which provides weekly tracking and analysis of the lumber industry, reported a 170-percent increase in OSB prices in the past year, with a rapid spike in just the last two months.

The basic laws of supply and demand are a leading factor in the price shift for OSB. However, OSB manufacturers also are now competing with biomass energy suppliers for wood, particularly in Europe. American and European companies also can't rely on the developing world for steady demand. China, India and other countries are creating their own building products to fuel their construction booms.

Also, natural disasters have played a role. For example, Chile is a significant wood producer, but the industry froze up after earthquakes this year. Finally, the U.S. dollar may continue to be weak for a while, driving up domestic costs. Wood imported from Canada's vast forests, for example, is more expensive in U.S. dollars than it was one year ago.

Who is hurt?

The price increases are hurting remodelers - DIY homeowners and professionals - more than homebuilders. OSB comprises a good chunk of the cost of a reproofing project. For new construction, OSB is only a small fraction of overall costs, and large builders can lock in favorable contracts that aren't as heavily affected by price swings.

Who is Helped

Of course, rising prices aren't bad for everybody. Louisiana-Pacific Corporation, a major engineered wood manufacturer, this week reported a 44 percent increase in total revenue from the first quarter of 2009 to the first quarter of 2010. The company attributes it to the increase in construction as well as rising prices and booming sales for OSB.

"2010 started out stronger than expected driven by improved OSB pricing as well as volume growth due to customers replenishing inventories," said Chief Executive Officer Rick Frost in a press statement about his earnings report.

To be sure, the company is not reaping whirlwind profits on rising prices for composite wood. The OSB division still lost $5 million in the first quarter, but that is down from a $24 million loss in the first quarter of 2009.

If you need OSB for a summer remodeling project, wait to see if prices level off, but don't expect a return to 2009 prices. It may never happen.