Materials Companies: (OSB/OSB CN, LPX, 1COV GR)

Publicly traded companies mentioned herein: BASF SE (BAS GR), Covestro AG (1COV GR), Huntsman Corp (HUN), Louisiana-Pacific Corp (LPX), Norbord Inc (OSB; OSB CN), ServiceMaster Global Holdings Inc (SERV), Wanhua Chemical Group Co Ltd (600309 CH)

Highlights

The presenter sees the potential for further declines in Norbord, Louisiana-Pacific (LPX), and Covestro shares. The story for these companies is substantially the same, in his opinion, as oriented strand board (OSB) and TDI/MDI (foams), respectively, experienced relatively sharp price increases through 2017 and into 2018. This drove solid profits (high EBITDA) across the industry/sector and allowed the companies to delever; however, the cost curves for these commodities are flat, and toward year’s end capacity additions and market dynamics sent prices lower (back to ~$200 per Msf 7/16" for OSB and a spread of $1,200 for foam). Despite the readily observable price declines in the market, the Street has yet to adjust expectations to reflect/incorporate reality. And, in the presenter’s experience, “The best commodity trades are based on supply calls;” in these “anchor bias” cases, the stocks tend to decline until expectations have been adjusted. As such, he reasons that here could be 30% - 50% downside for shares of Norbord and Covestro. While LPX has a “spectacular” balance sheet (incl. $6 - $7/share of cash) and its business could perform relatively well through the cycle, its stock may not be immune to the overarching trends.

Starting with the OSB market (Norbord and LPX), the presenter explained how prices spiked to $400 per Msf as recently as mid-2018 due to hurricanes, plant outages, etc., which resulted in supply disruptions (the 10 - 15-year average price is $250). While LPX and others talk about diversifying their businesses away from the risks associated with the commodity OSB cycle, it can’t really help this time around.