Summary
• Kronospan will shut down for 10 days this month and Medite will take downtime “shortly”.
• Some deals are being done for raw and lightweight board.
• Sales of melamine-faced, MR and FR board are holding up relatively well.
• Reduced sawmill production could drive up the price of co-products.
• The strength of the euro and high transport costs are deterring overseas producers from shipping to the UK.
With demand for MDF already stuttering and unlikely to reignite during the summer holiday season, domestic manufacturers have been forced to give greater consideration to the implementation of downtime as a means of controlling their inventories.
So far this year, a number of European producers have halted lines in order to prevent an excessive build-up of stocks and, according to UK sales representatives for some of these mills, more stoppages are planned for the near term. And while domestic manufacturers have traditionally resisted this approach, it has become regarded increasingly as a valid – if unpalatable – option. A senior figure at one of the three major domestic producers said: “Downtime is now a regular occurrence throughout the whole of the industry. It is seen as a definitive method to control inventories rather than lowering prices, which is not the approved methodology any longer.”
A further break in production has already been confirmed for the Kronospan facility at Chirk, where one of the MDF lines was closed for six days prior to Christmas last year and the other for five days shortly afterwards. One of these lines will be stopped for 10 days this month – a move which will allow the company to carry out a specific maintenance project while, at the same time, bringing its inventory into a more comfortable balance with demand. “Stocks are currently above the desired levels – this will give us a stock level we can live with,” TTJ was told.
Meanwhile, a spokesperson for the Medite production facility at Clonmel in the Republic of Ireland confirmed that downtime of an as yet unspecified duration was likely to be taken “shortly”.
Maintaining value
News of these and other shutdown decisions elsewhere in Europe will bring some cheer to the distribution sector. With low demand putting ever-increasing pressure on price levels at a time of escalating production costs, it made “absolute sense” to implement periods of downtime in order to help underpin the hard-won value of the product, according to one contact.
Another senior industry figure described the greater willingness of domestic producers to embrace downtime as a sign of the UK market’s “maturity”. In the past, he added, the summer period had been regularly blighted with cut-price deals from which the market had always taken time to recover.
That said, there is evidence of some deals being done within the domestic MDF market, especially in the raw board and lightweight sectors where order levels have suffered as a result of, most notably, reduced building activity. Sales into the shopfitting sector have also declined as store operators respond to falling revenues by cutting expenditure; similarly, MDF deliveries into the joinery trade have fallen in line with reduced business levels and project postponements.
An MDF producer acknowledged signs of “spasmodic but not wholesale price weakness” that was mainly “project or volume related”. However, the almost universal view expressed by both manufacturers and distributors is that an all-out price battle will not generate significant additional sales, if any at all. “If you drop your prices, you don’t actually sell any more board – you just end up selling the same volume but for less money,” was the familiar mantra repeated in a number of quarters.
While raw board and lightweight products are bearing the brunt of currently lacklustre demand in the UK, sales of other MDF products are performing markedly better. At least one domestic producer has witnessed a significant increase in its laminate flooring sales when comparing recent months to the corresponding period of 2007.
Value-added products
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“If you drop your prices you don’t actually sell any more board – you just end up selling the same volume but for less money” |
At the same time, orders for melamine-faced, MR and FR are said to have been holding up quite well; and with severe cost pressures impacting on all areas of the MDF market, price increases are mooted for some of these value-added products. For example, a leading manufacturer said that an FR price increase was likely in the near future given the rapidly rising cost of chemicals. And a distributor noted: “FR has seen no discounts this year and the next price move will undoubtedly be upwards because of phosphate and glue costs.”
Another leading distributor offered a different and somewhat more dispiriting perspective: “We are seeing price pressure on FR even though it is meant to be a value-added product.” And on the same point, another contact commented: “It’s not the manufacturers who are doing deals on MR and FR – it’s the distributors who are giving up a bit of their margin [in order to move product].”
Scanning the whole spectrum of MDF products, the major cost worries at present appear to be focused in three areas: energy; urea; and distribution. One of the domestic producers pointed out that gas costs had been below 20p per therm around this time last year but that the cost was now at 60p per therm. As for urea, prices have soared on the back of a block on Chinese exports which has been triggered by shortages. “Urea is a disaster,” complained an industry expert. “Resin suppliers have been breaking agreements on a quarterly basis because of urea prices going higher.”
Transport and distribution costs
Transport/distribution costs have become a major headache for UK industry as a whole, as evidenced by the recent haulier protests in London and Wales, the organisers of which have called on the government to implement an immediate reduction of 25p per litre in diesel duty for “essential users”. “We are having to meet higher costs from hauliers otherwise they could be put out of business,” said an MDF producer. “It is affecting us both on timber supply and delivery of our finished goods.”
There is also concern that reduced activity in the sawmilling sector could drive up the price of residues and that the problem of bad debts will escalate as consumers in almost every sector feel the pinch.
While nobody is pretending that conditions within the MDF market are anything other than difficult, it is still possible to draw a few positives. For example, the strength of the euro in relation to sterling and high transport costs is continuing to deter the bulk of overseas producers from shipping into the UK market – despite the fact that many of them are experiencing very low levels of demand in their home markets. Furthermore, at least one of the domestic MDF manufacturers has been looking to capitalise on the currency situation by examining export possibilities of its own.
In general, overseas producers who have continued to ship board to the UK have tended to be those with an established presence in this market, “but even some of these regulars are not looking at the UK as a fall-back at the moment” because of currency and cost factors, TTJ was told this week. Significantly higher transport-related costs have put paid, for example, to the imports of Asian MDF seen earlier in the year. An importer explained: “FOB levels have been attractive but oil and freight costs have stopped it.”
Interest rate impact
Also on the positive side, some contacts said this week that interest rate cuts could help significantly to alleviate “the general economic malaise” and therefore the reduced demand for MDF. One of the domestic manufacturers reported that sales in April had been “reasonable” but that the decision to hold rates steady in May had had an immediate, adverse impact on business confidence and therefore buying patterns. “A lot depends on interest rates and the global economy,” he said.
For the moment, however, a large proportion of buyers appear to have adopted a hand-to-mouth approach to purchasing – either because they expect MDF prices to drift lower or because they do not want to be saddled with any excess inventory at a time of economic uncertainty. A senior producer summarised the situation: “The big change is that the stocks are now with the manufacturers and not out in the market.”
