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(Reuters) - Canadian wood panel maker Norbord Inc NBD.TO sees little chance of an improvement in prices for its main product in Europe this year as the industry diverts production that formerly went to Russia and Ukraine to markets such Germany and the UK.
Norbord, which makes wood-based panels known as oriented strand board (OSB), has been focusing on Europe to compensate for a weak house-building market in North America.
OSB, consisting of strands or chips of wood bonded together with a synthetic resin, is cheaper than plywood and is commonly used for flooring and roofs and as wall sheathing.
Norbord Chief Executive Peter Wijnbergen said that much of the OSB that Russia had been importing had been passing through ports in Ukraine, where there has been heavy fighting between government troops and separatist rebels.
The crisis means OSB meant for Russia and Ukraine is now being diverted to Western Europe, "holding back the OSB price increases that we have anticipated," Wijnbergen said.
"We anticipate ... the second half will be similar to first half from pricing perspective in Europe," Wijnbergen said in an interview.
Norbord - which has three plants in the UK and one in Belgium - said last month that European OSB prices fell about 1.5 percent in the second quarter compared with a year earlier.
In North America, they fell by more than a third.
Norbord, whose earnings have declined for four quarters in a row, got about 40 percent of its revenue from Europe in the second quarter. The company's revenue from the region rose to $464 million in 2013, from $376 million in 2010.
"In Europe, demand is growing. All the mills are running flat out," Wijnbergen said.
Underscoring the company's longer term positive outlook for the region, Norbord is working on plans to build a larger OSB mill in Scotland to take advantage of plentiful supplies of wood.
The new mill, if approved by the board, would be Norbord's biggest investment in Europe, Wijnbergen said, declining to give financial details.
The company's last major investment was 10 years ago, when it bought its Genk mill in Belgium for 15 million euros.
"In North America, we do not see a need for new capacity," Wijnbergen said. "Clearly ... we see things differently in Europe."
OSB is fast displacing plywood and other types of structural panels in Europe, and now accounts for more than a third of the total market compared with about 15 percent in 2002.
"Our mills are running flat out there. To go with our customers we will need to find a way to add additional capacity," said Wijnbergen, who took the top job on Jan. 1.
He ruled out adding capacity through acquisitions, however.
"All the mills are running flat out. So it's unlikely that we will see mills that are available for sale."
Two of Norbord's four mills in Europe make OSB. The company also makes furniture and other engineered wood products such as particle board, which is made from wood chips and sawdust.
"The interesting thing is that OSB development in Europe is running about 15 years behind in North America," CIBC analyst Mark Kennedy told Reuters.
"So we know that there is potential for (OSB) to keep growing for the next number of years. It will continue to take market share from other panels."
Norbord's shares have dropped more than 35 percent this year, lagging a near 11-percent rise in the Toronto Stock Exchange's S&P/TSX composite index .GSPTSE.
The shares, which closed at C$20.82 on Thursday, trade at nearly 14 times estimated forward earnings.
(This story has been filed again to fix paragraph 11 to say "working on plans to build" instead of "plans to build". In paragraph 12, adds phrase "if approved by the board")
Writing by Sayantani Ghosh in Bangalore; Editing by Ted Kerr