Summary
• Some UK and overseas chipboard producers are taking downtime.
• MDF and OSB producers are also interrupting production.
• The move will reduce the risk of large volumes of stock building up.
• Manufacturers’ costs have risen dramatically in the past year.
• They are determined not to discount prices, and may raise prices early in the new year.
At the end of a year in which demand has been largely positive, a number of domestic and overseas chipboard producers confirmed their intention to take significant downtime during December.
UK producers were keen to stress this week that orders have not been abnormally weak in the run-up to the festive period. Instead, the key factors behind decisions to stop the presses were, they said, the unrelenting rise of direct costs and the extended Christmas holidays planned by many customers. In effect, with sales opportunities severely limited by the Christmas break, full-on production would result in large volumes of expensively-produced chipboard going into stock.
One domestic producer said in summary: “I don’t see much point in building stock and then selling it at loss-making prices.” Another ventured: “We can’t afford to build stock during Christmas and then discount it – it doesn’t work. I would rather reduce volumes than sell it cheap.”
As reported in the last issue of TTJ, Kronospan wrote to its customers in early December to confirm that chipboard production at Chirk would be halted for 12 days in the first half of the month. Production stops of five and six days were also scheduled for the factory’s two MDF lines. In previous years, the company has continued to turn out product throughout the festive period. Customers were told that demand had been weakened by a combination of interest rate rises, the “credit crunch” and house price deflation. At the same time, the company faced ongoing cost increases across many of its key raw materials.
Price plan
The pressures are such that Kronospan has already declared its intention to implement chipboard and MDF price increases during January and February, the scale of which would depend on the product and segment, but would average out at around 3%. Kronospan was keen to point out that some of the key chipboard market fundamentals remained strong: for example, there was a continuing housing shortage, it noted.
Meanwhile, all chipboard production at Sonae UK’s Knowsley facility is scheduled to be suspended from December 22-27 inclusive. A six-day break in production was also implemented in October.
Some of the leading Continental chipboard mills have also confirmed plans to take downtime around the Christmas period, including facilities in Germany, France and Belgium. A UK-based agent for one of these mills said a two-week shutdown was planned even though the order book remained relatively healthy and lead times were still at two to three weeks. In a reference to the extended holidays being taken by customers, he added: “There’s no point in producing when it’s so hard to deliver.”
It should also be noted that the decision to take downtime in December has not been limited to the chipboard market, with production stops also reported from the MDF and OSB sectors.
A leading domestic chipboard figure told TTJ that “enormous cost pressure does not allow for discounting of prices”. Comparing the third quarter of 2007 with the final quarter of the year, he calculated that his company’s electricity and gas costs had risen by 71% and 125% respectively. At the same time, urea costs had increased 53% while methanol prices had surged a particularly alarming 130%. Partly as a result of competition from the biomass sector, timber prices were already high and were likely to continue to trend upwards. “The problem is that those increases have not come to an end yet, and seem set to keep rising into next year,” he said.
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“We can’t afford to build stock during Christmas and then discount it – it doesn’t work. I would rather reduce volumes than sell it cheap” |
According to feedback from another leading chipboard producer, methanol is applying the biggest cost pressure at present. “It is adding about 4.5-5% to our overall costs,” a spokesperson calculated. Another producer asserted: “I am not prepared to drop prices in light of the higher costs. We will try to keep our prices as stable as possible, but it’s not feasible to drop them.”
Continued production
Not every producer is taking downtime, for example, there was no plan to interrupt T&G flooring output at the Norbord facility at Cowie during the festive season, a spokesperson confirmed. And according to Egger UK, the company does not intend to stop production at its recently-revamped Hexham facility where two older lines have been closed following the commissioning of a new ContiRoll line this year. “We are not building stock at the moment,” a spokesperson told TTJ. “Overall, demand is still quite strong.”
At the same time, he added, exchange rates were helping to keep imported board out of the UK. However, cost inflation would certainly result in some chipboard price increases early next year, the same spokesperson went on to say. “And unless we see some real decrease in the cost pressure by the second quarter, there could be some wholesale [price] changes,” he added.
All chipboard producers – whether they are taking downtime or not – are clearly hoping for a swift return to healthy buying levels in the new year. Several producers said that they would be waiting until the early weeks of 2008 before making any definitive decisions about price movements. To date, only Kronospan has outlined its pricing intentions for January and February, although a UK-based representative for at least one overseas producer said “we are being asked for price increases by our principal for next year”. It should be remembered that UK prices are still trailing those on Continental Europe, even before additional transport costs are taken into account.
As mentioned earlier, demand ahead of the production stops was not altogether disappointing, with one of the leading domestic producers saying that “we are selling what we make”. Looking at the individual product segments, a spokesperson for one of the domestic chipboard producers confirmed that October had been “a record month” for his company’s melamine-faced chipboard (MFC) operation. Since then, the MFC market had “slowed a little earlier than normal”. According to a fellow producer, the market was following the normal pattern of being “quite busy” in the run-up to the Christmas period.
Some T&G flooring producers described the market as quiet, with one suggesting that over-buying earlier in the year had left many customers sitting on more than adequate stocks. One flooring specialist said that sales volumes had been “holding up” when compared to the same period in 2006, although he also acknowledged nervousness within the housebuilding sector as it headed into 2008, with reports of contracts being cancelled for certain city-centre flat developments. There was no intention, he added, to engage in price-cutting ahead of the festive season break. “Dropping the price in December isn’t a very good idea,” he said. “People aren’t looking to stock so it won’t bring in any more business.”
As for raw board sales, a leading producer accepted that demand had gone “a bit quieter” in recent weeks but insisted: “I am not worried about sales volumes.”
Positive response
The actions of the producers have been given a generally warm response from other players in the domestic chipboard sector. Several acknowledged that producers, distributors and customers had made painstaking efforts over a long period of time to return value to some of the key panel products, including chipboard. “We have to make sure that we are not endangering this,” said one producer. “We now need this extra value to compensate for the higher costs.”
A non-producer contact, who has spent almost 40 years in the sector, described the December downtime move as “very heartening”. This was the first time in his recollection, he said, that manufacturers had stopped the presses “to conserve value” and served to “demonstrate to the particleboard consuming industry in general that it’s not a cheap product”.
