Summary
• Prices are unlikely to rise again this year and there is evidence of lower-priced offers seeping into the market.
• Some believe there were too many price rises this year but producers disagree.
• There is pressure from MDF imports from the Continent.
• Methanol prices are expected to rise by 60% in the final quarter.

Temporary blip or tipping point? That was the question exercising minds in the domestic MDF market this week.

Following a prolonged period of sustained upward price momentum, there is no doubting that the mood within MDF circles has altered. The past five months have brought no further increases from the trio of leading UK manufacturers; indeed, recent weeks have thrown up evidence of lower-priced offers seeping into the market place, most notably on the lighter forms of MDF. Pressure is said to be coming in particular from board imported from the near Continent.

But while accepting that some cheaper selling has been taking place, domestic manufacturers have reiterated their own resolve to stand firm on prices. A senior spokesperson for one of them told TTJ: “We have not weakened at all on our prices. People are trading off inventories and so they are not replacing it as quickly as they are selling it. This has led to the weakest suppliers in the market actually reducing their prices.” Another leading domestic producer figure said that his company had held firm on its prices – with the exception of “an adjustment” on light board to take account of “the new market level”. And he added that, in order file terms, this adjustment “has not opened the flood gates and so we must have got it right”.

In effect, producers are being asked to perform a delicate balancing act between maintaining a determined stance on prices and protecting their market share.

According to many experts, there is absolutely no scope for risking further price hikes in the near to medium term – despite acknowledgement of the fact that producers are likely to be confronted with ever-mounting cost pressures. The market was already perched on a “knife edge” and faced the imminent threat of the “December factor”, TTJ was told this week. “It would be suicide to put up prices before Christmas and producers will be hard pressed to do it all in the near term.”

Underlying robustness

Producers too appear to accept that we have probably witnessed our final domestic price increase of 2007 but remain bullish about the underlying robustness of the MDF market. One suggested that “an increase could actually happen on January 1 because the industry has been hit by significant increases on the costs of resin”, although he was quick to add that any hike would be limited to “keeping pace with costs”. Another domestic producer signaled the possibility of announcing an MR mouldings increase prior to Christmas for implementation at the start of January. It was explained: “We haven’t had the price recovery on mouldings we should have had.”

So what are the arguments deployed by the “temporary blip” camp? First and foremost, they maintain that UK demand for MDF remains relatively strong: lead times have shortened but remain “manageable”, it is contended, and order files have remained decent for a range of MDF products, including laminate flooring, MF and MR. The market is attracting adjectives such as “stable” rather than “buoyant” but, according to producers, “we are still selling what we make”. Certain consuming sectors are reportedly busy – including shopfitting and general joinery – although “some clients are far busier than others”.

In addition, producers claim that they are being forced to remain steadfast on their selling prices – even during this somewhat more uncertain period – because of the squeeze applied by ever-mounting costs. It was confirmed towards the end of September that methanol prices would be increased for the final quarter of 2007 by around 60%, according to consumer feedback. A move of such scale has a significant, direct impact on production costs and is one of the main reasons behind the aforementioned proposal from one manufacturer to raise its MR mouldings prices in the relatively near term. Another domestic MDF producer commented: “We were worried at one point that methanol would be short. The price doubled on the spot market and we were told to take it or leave it.” This analysis was echoed by another sector expert who said the methanol price hike could influence production decisions.

At the same time, there has been continuing pressure on wood supply owing to, among other factors, increased competition from the biomass sector. Of course, as we head into the winter months, weather conditions may serve to reduce still further the availability of timber to the MDF production sector. “The real question today,” said one manufacturer, “is do you have the raw material to satisfy your needs?”

Finally, in the context of costs, energy prices tend to rise – sometimes strongly – during the winter, with one MDF producer stating this week: “Our gas prices have doubled since the end of the summer.”

Demand growth

Producers and other supporters of the “blip” theory also point to the longer-term picture and to the strong demand growth indicators. For example, one domestic producer that UK consumption of MDF may be on course to increase by around 10% in 2007. And with no new major UK capacity planned to come on stream, even in the medium term, the suggestion is that supply is not about to dash well ahead of demand.

The capacity expansions being planned and implemented in other parts of the world are not a threat, it is argued, but rather another tangible sign of the confidence in the durability of global MDF market growth. “In 2008, we expect a still-firming market – although it may take a month or two to get going,” said one domestic producer.

A UK agent for a board supplier pointed to strong growth in MDF demand among the developing regions of the world and also to the lift that the 2012 Olympic Games may begin to give UK order files. Prices may be under pressure, he said, “but they are still at high levels in the context of where they were a few years back”.

On the other side of the argument, those experts who are claiming that the market has reached a “tipping point” also point to the shortening of lead times as well as to the ready availability of material whereby the market “is well stocked on most MDF products”; the emergence of some cheaper prices; and the more noticeable intrusion of imported board. According to one contact, most of these imports are arriving from fellow EU countries, whereas increased transport costs are proving prohibitive for exporters from further afield.

On a wider economic scale, they note a deepening nervousness among MDF consumers owing to, among other factors, the effects of rising costs on their operations as well as the impact of higher interest rates on their own customers’ preparedness to buy. In addition, MDF buying interest in other key markets – such as Germany – has failed to improve markedly following the summer holiday period.

There are fears in some quarters that new capacity scheduled to come on stream in Continental Europe and further afield will come up against lacklustre domestic and regional demand, thereby forcing operators to look elsewhere for their sales. The UK could suffer a “ripple effect”, it has been suggested.

Returning to recent developments, several experts argued that the MDF price increase introduced at the start of the summer constituted “one too many” and had effectively “over-cooked” the market.

Unsurprisingly, domestic producers beg to differ: they contend that prices have been left largely untouched since June to enable the market to overcome this “blip” but that there will be a resumption of the determined, long-term push for further price progression.

“This trend will not stop,” TTJ was told by one leading figure. Another senior domestic producer spokesperson stated: “Our ability to drop prices because of a bit of imported board is almost non-existent.”