North American oriented strand board buyers reduce reliance on contracts in 2023

Scaling back on contracts represents a huge contrast with the strong performance of recent years

Many oriented strand board (OSB) buyers in North America are scaling back contractual commitments with suppliers during negotiations for 2023, widely anticipating that open-market mill offerings will be more abundant next year.

The strategy represents a stark shift compared to recent years in which buyers ramped up contracts to ensure coverage amid perceived scarce supplies.

“The last couple of years everybody maximized contracts. That’s not the market anybody is anticipating next year,” a sales manager for a large distributor in the South noted.

Contract cancellations

Buyers’ retreat from contractual volumes is especially evident in western delivered markets. At least one large OSB distributor on the West Coast recently canceled 100% of the company’s contract commitments from producers in 2023.

Several sales managers noted that mill contracts have reduced profit margins for their respective companies more often than they have added value in recent years. “We are positioned nicely, but margins are likely going to be ugly,” noted a buyer based on the West Coast.

Many other West Coast distributors have pared contracts by varying degrees and plan to trade more heavily in the open market next year. “We are going to be overproduced,” another distributor in the West predicted.

Future predictions

Buyers throughout the distribution pipeline anticipate demand for OSB to fade next year compared to 2022. This perception is especially prevalent among distributors and dealers tied heavily to the single-family housing industry. Many economic forecasts indicate rising interest rates will take a toll on that sector, as has been the case in the latter half of 2022.

Some distributors in the South noted that their dealers won’t abandon contracts altogether next year, but will reduce the percentage of projected needs they cover through contracts to more historically normal levels. “A lot of people want to have 40-60% on contract,” one distributor noted.

The Random Lengths Oriented Strand Board Composite Price averaged $775 through October, hovering hundreds of dollars above historical levels and second only to the record-shattering annual average of $918 in 2021.

Traders note that even if prices fall substantially in 2023 compared to 2022 levels, they would still remain elevated by historical standards.

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