TORONTO (Reuters) - Shares of Canadian wood product companies rallied on Thursday as investors bet that Louisiana-Pacific Corp’s (LPX.N) purchase of Ainsworth Lumber Co ANS.TO pointed at the potential for further consolidation within the sector.
The C$906 million ($864 million) deal, announced late on Wednesday, is also likely to trim the extreme volatility for the price of oriented strand board, widely used in home building.
The North American forest products industry, which has idled vast amounts of capacity since the U.S. housing market crashed, is notorious for mismanaging supply.
Early signs that the U.S. housing market was recovering prompted a slew of mill restarts late last year, and OSB prices then fell sharply as supply outpaced demand.
The LP-Ainsworth deal expands LP’s share of the North American OSB market to roughly 30 percent. The top six OSB producers will now control nearly 90 percent of the market, and investors and analysts hope this will reduce the risk of too many players restarting too much capacity too quickly.
Deutsche Bank analyst Mark Wilde said the OSB industry could enjoy a healthy market for a few years, if U.S. housing starts return to normalized levels around 1.4 million to 1.5 million. U.S. housing starts were an annualized 896,000 in July.
“However, if capacity comes back too quickly the party could end even before it starts,” he warned in a note, adding that further consolidation could lead to more disciplined restoration of supply and more muted swings in OSB prices.
The LP-Ainsworth transaction sent the Thomson Reuters Canada Forest & Wood Products Index .TRXFLDCAPFORP up about 4 percent, with shares of rivals including Western Forest Products Inc (WEF.TO), Norbord Inc NBD.TO and Canfor Corp (CFP.TO) posting big gains.
Reid Carter, who is managing partner and head of the global timber group at Brookfield Asset Management, says he is cautious about the scope for large-scale consolidation within the space, given that the large players already have significant market share.
“There is some general enthusiasm following this deal,” said Carter, whose firm owns majority stakes in both Ainsworth and Norbord. “Anytime there is significant consolidation in the industry, people hope there will be better supply discipline.”
Vancouver-based Ainsworth has four OSB manufacturing mills in the provinces of Alberta, British Columbia and Ontario, with a combined annual capacity of 2.5 billion square feet and the potential to increase capacity to 3.1 billion square feet.
Shares of Ainsworth, the most actively traded stock on the Toronto Stock Exchange on Thursday, were up 33.5 percent at C$3.93 on Thursday afternoon, while those of LP were up 11.2 percent at $16.97 on the New York Stock Exchange.
($1 = 1.0485 Canadian dollars)
Editing by Janet Guttsman and Matthew Lewis