Building materials: part 2a (LPX, JHX)

Related post: Building materials: part 1

In the 1967 film The Graduate, a young Dustin Hoffman is pulled aside by a friend of his parents, who offers the restless protagonist a simple piece of advice: “one word: plastics”. This versatile material had by then seeped into every crevice of American industry and was pitched as a secure career choice by a member of an older generation that had it all figured out. The ubiquity of plastics and its pragmatic appeal assumed another interpretation, though, in the context of the film: the triumph of mass production over craft, homogeneity over differentiation, ennui over meaning and adventure.

Residential siding, the protective shell covering the exterior of a house, is one manifestation of plastic’s industrial, if not symbolic, significance. Homeowner mindshare is a relevant consideration. Specialty manufacturers will invest in advertising to develop brand awareness and showcase the aesthetic merits of their products on TV and social media. James Hardie has become synonymous with fiber cement siding to such an extent that installers often refer to fiber cement panels as “Hardie boards”. While appealing to consumers, specialty manufacturers also develop trusted relationships with a limited number of distributors in a given region, sometimes going as far as entering into informal exclusive pacts. In return for limiting distribution, a well-established brand like Hardie or LP, with 85%-90% category share, may require distributors or dealers to to commit to their brand at the exclusion of others, as well as carry a certain amount of inventory and provide product support for the dealers they sell to.Vinyl, a byproduct of mass produced polyvinyl chloride (PVC) resin, had by the mid-90s overtaken wood to become the most common siding material in the US. Unlike wood, vinyl siding can be mass produced in a factory. It isn’t susceptible to insect infestation or water rot, and endures for more than 20 years without maintenance and repaint. It is far lighter and easier for contractors to handle and install, assuming the form of panels that snap into place. To a homeowner, the cost of a vinyl siding project is ~1/10 that of hardwood.

But vinyl has important downsides too. It warps in extreme heat, cracks in extreme cold, and damages more easily when exposed to strong winds and hail. The wood patterns that manufacturers emboss onto it fade over time. Vinyl is used because it is reliable and cheap, not because it is pleasing to look at. Homeowners willing to yield on price can get the durability of vinyl and the aesthetics of wood or stucco through two other options: fiber cement and engineered wood. Of the dozen or so exterior cladding options commonly available, these two have gained the most prominence over the last 20 years. Their popularity has come at the expense of vinyl, whose share of siding has declined from 35% in 2010 to around 20% today.

Of the $10bn US market for exterior cladding deemed addressable by Louisiana-Pacific, fiber cement and engineered wood account for 22% and 12%, respectively:

Source: Louisiana-Pacific Investor Day (2/28/24)

Those particular siding categories are near monopolies, with James Hardie claiming 90% of fiber cement (a hardened slurry of cement and wood fiber) and Louisiana-Pacific’s SmartSide brand claiming ~85% of engineered wood (an enhanced formulation of OSB):

Source: Louisiana-Pacific Investor Day (2/28/24)

Both companies see share gains from wood and vinyl, with nearly 50% of the siding and trim market, as an ongoing driver of growth. In a market constrained by labor, contractors and home builders want products that are easy to install, protected by decades-long warranties, demanded by homeowners, and meet high quality standards. Fiber cement and engineered wood siding manufactured by James Hardie and LP, respectively, optimize across those considerations.

My last post drew a distinction between commodities like lumber and oriented strand board (OSB), whose prices are volatile and change from week-to-week, and specialty items like siding and decking, whose list prices are set by manufacturers and tend to rise on a predictable annual cadence. Building products fall along a spectrum: “as you move from commodities like lumber and OSB; to somewhat more engineered wood products like I-joists and trusses or even value-added variants of OSB; to specialty, branded items like composite decking and siding, pricing decouples from underlying material costs”. The specialty end tends to be limited exterior products, where aesthetics matter, while the commodity end encompasses interior products – subfloors, floor joists, ceiling trusses – that the homeowner never sees.

Homeowner mindshare is a relevant consideration. Specialty manufacturers will invest in advertising to develop brand awareness and showcase the aesthetic merits of their products on TV and social media. James Hardie has become synonymous with fiber cement siding to such an extent that installers often refer to fiber cement panels as “Hardie boards”. While appealing to consumers, specialty manufacturers also develop trusted relationships with a limited number of distributors in a given region, sometimes going as far as entering into informal exclusive pacts. In return for limiting distribution, a well-established brand like Hardie or LP, with 85%-90% category share, may require distributors or dealers to to commit to their brand at the exclusion of others, as well as carry a certain amount of inventory and provide product support for the dealers they sell to.

Sometimes consumers looking to remodel their homes will ask for SmartSide or James Hardie by name; but most of the time they will go with the recommendation of installers, who will push SmartSide or James Hardie because those manufacturers carry a well-earned reputation for quality products; offer a wide array of textures and colors; can be installed by contractors, whose single largest cost is labor, with relative ease; and are amply supplied by local dealers. Rebate programs, tiered by volume, nudge dealers and contractors to orient their efforts around a single brand. In short, branded siding products are vice-gripped into place by the pull of homeowners and the push of contractors and dealers, making them difficult for a competitor to dislodge absent meaningful improvements in cost, appearance, and durability.

That LP has come to command a meaningful presence in a branded specialty category like siding is surprising given how rooted it is in OSB, a classic commodity. Fifty years past its founding, even with a substantial amount of plant capacity since converted to siding production, LP is second largest manufacturer of OSB after West Fraser, with 16% share. OSB, you may recall from my last post, is made by slicing logs into thin, rectangular strands that are then dried, mixed with resins and wax, laid out in an alternating perpendicular pattern, and smooshed by a heated press, bonding strands and resin into stiff, study panels that are commonly used as sheathing materials for walls and floor bases. It is a substitute for plywood, with demand switching back and forth between the two depending on their relative prices.

Source: Shutterstock

LP contracts about 2/3 of its OSB volume for sale at the start of each year, with the remaining 1/3 sold on the open market¹. Prices, pegged to those published by Random Lengths the previous week, are insanely volatile, and volumes fluctuate according to housing starts (~60% of OSB is sold into new residential construction). Profitability is therefore a crapshoot, impossible to predict from one year to the next.