Summary
¦ Supply shortages are starting to appear.
¦ Prices are continuing to rise.
¦ UK chipboard prices are lower than on the Continent.
¦ Finsa has told UK customers it cannot supply P1, P2, and P3 in May.
¦ Transport costs and availability are problems for producers.
¦ European exports to the UK have slowed to a trickle.

Chipboard sales volumes have remained reasonably robust in the UK at levels generally above those recorded in the corresponding period last year. According to one of the leading domestic producers, his sales volumes underwent a “double-digit” improvement in the first four months of 2011. This was particularly pleasing, he said, given that April this year was more heavily affected by holidays than normal.

However, it is the tightening stranglehold on availability rather than pure demand that appears to be the pivot on which the UK chipboard market is turning at present. One contact said that chipboard shortages had already begun to emerge in some areas, for example thick dimensions and certain technical specifications. However, he did not rule out the possibility of supply becoming more threadbare across a wider range of chipboard products.

Another producer contact said that his company’s lead times were currently within acceptable limits “but we wouldn’t want them to go out any further”, he added.

Prices

Against this backdrop, chipboard prices have maintained their firmness. In Norbord’s most recent financial report covering the January-March period, it said that average chipboard prices increased by 2% when comparing the first quarter of 2011 with the final three months of 2010. The average price of chipboard was 7% higher in January-March this year, it added, when set against that for the corresponding period in 2010.

When adding in second quarter price moves, some believe that the average chipboard increase in the UK has exceeded 20% to date in 2011 – “and there will be more to come”. Indeed, a UK producer which hiked its chipboard prices by up to 10% with effect from the start of April plans to introduce another increase – of “an average of 5%” – at the end of June.

Another UK manufacturer cited rising wood and chemical costs as key reasons for the implementation of chipboard price increases ranging from 6-12% depending on product. “This unfortunately is the third increase this year in some cases,” he said. But he also added: “Even with these increases, they only just keep in line with cost movements.”

Use of the word “unfortunately” reflects concern among chipboard producers that what have become regular – but unavoidable – price increases are building up pressure on customers at a time when many of them are struggling to pass on this added cost to their own clientele. A fellow producer acknowledged that chipboard manufacturers have a responsibility to be “careful” in the way they manage their price increases; nevertheless, the potential for bad debts remains an ever-present worry.

Maintenance shutdowns

In terms of pure production matters, one of the leading domestic chipboard producers confirmed this week that it had taken its planned annual maintenance break in the first half of May and that the shutdown had been limited to five days – less than in previous years. No further production breaks are envisaged for the coming months, a spokesperson said, because “we aren’t expecting the summer to be quiet”.

Chipboard supply within the UK can be expected to remain tight – not least because significant downtime remains to be taken elsewhere over the summer period. For example, and as noted in Norbord’s financial statement. the company’s chipboard line at Cowie in central Scotland will be shutting for three weeks in June during the second phase of a multi-million investment project at the site.

The first phase, dealing with dry goods storage and handling, was completed last year while the second stage covers the forming line installation. According to Norbord, the £7m project will bring improvements to surface quality, edge tightness and weight distribution. At the same time, it will offer the company the opportunity to extend its product range.

The Cowie investment programme is also intended to generate cost savings – partly by reducing raw material wastage and thereby partially offsetting what the company describes as “huge” input cost increases. This project is also expected to extend production capacity at the plant by more than 10%.

Lack of imported volumes

A further constraint on supply in the UK is the lack of imported volumes. Established market player Finsa has written recently to its UK customers to say that it would not be in a position to accept any orders in May for P1, P2 and P3 because of a lack of available capacity. This situation is not expected to change in the near future, a company spokesperson confirmed this week. Most of Finsa’s production is staying within the south of Europe, he added.

The loss of significant chipboard production capacity on the Continent in recent times – and the likelihood of more cuts to come – has made availability a key issue across Europe. And so despite rising prices for chipboard in the UK, prices on mainland Europe have still maintained a healthy if not growing differential, with one leading domestic industry figure stating: “Prices are still around 15-30% higher on the Continent [compared to the UK].” A counterpart at another UK operation put the gap at “more than 20%” on an ex-works basis, although other contacts suggested that price differentials of this scale did not apply across the entire chipboard product range.

Some of the nervousness surrounding chipboard availability on the Continental market has been alleviated by the more positive news from major producer Pfleiderer. As noted in our previous chipboard report, a combination of capacity reductions and price increases in Germany had resulted in the group returning to the black in the early part of 2011; and on May 12, Pfleiderer confirmed that it had agreed with its creditors on the financial details of the group’s restructuring. This latest development “means that the foundations have now been laid to return the Pfleiderer group to a sound financial and equity base once again,” said Hans Overdiek, chairman of the group’s executive board. “The implementation of the concept will lead to an enormous reduction in debt, which will give us new scope for action. We now have the opportunity to move forward with the restructuring of the group’s operations and to conclude it successfully.”

The chipboard price gap between the UK and the Continent has helped to ensure that imports into this country have been kept to a trickle. Other factors that have impacted negatively on import volumes include: the relative strength of the euro to the pound; an economic recovery in parts of the Continent that has been significantly more robust than the growth enjoyed in the UK; and rising transport costs.

Transport costs

Indeed, transport was mentioned by several contacts this week as a source of mounting pressure, not only in terms of cost but also availability. One producer spokesperson said that his company’s transport costs had gone up “around 8% in the last few weeks alone” as hauliers pushed up their rates in a bid to claw back their own additional costs. And according to a fellow chipboard producer, haulage space is difficult to book in certain parts of the UK “because the capacity just isn’t there any more”. Although this is already “a major problem”, he added that a lack of haulage options could prove substantially more problematical if the UK were to experience even moderately improved economic growth.

The other major cost pressures bearing down on domestic chipboard manufacturers are decidedly familiar. Timber raw material costs are said to be continuing to rise steadily, while urea has reportedly sustained an increase of around 10% in the last few weeks. On the face of it, largely static energy bills over the last couple of months could perhaps be taken as a positive but, as one producer pointed out, “we now have winter prices in the summer months”.