The summer of 2006 – characterised by its unusually strong sales activity and significant price increases – was always going to be a tough act to follow. Demand appears to have remained reasonably robust over recent months, without ever coming close to reaching those same rarified heights.
Delivery times have dropped from two months and longer at one stage this year to nearer two weeks for most producers, leading to what was described this week as “a small injection of nervousness” in the UK market place. However, with chipboard producers confronted by yet more cost increases, they are certainly remaining resistant to any suggestion of price reductions.
According to a leading UK producer figure, activity levels during the recently-ended summer period were lower than those of last year, but “better than we would normally see” during the holiday period, while his firm’s current lead times were put at around two weeks.
On the demand side, he pointed to decent order files for flooring and kitchen furniture from, respectively, the building and social housing sectors. In effect, interest rates may have helped to take much of the steam out of the housing market but, as reported in the previous issue of TTJ, construction work has hit a nine-and-a-half-year high of late.
Pre-Christmas push
The same producer suggested shopfitting orders have also been quite healthy as retailers have looked to gear up their stores for the pre-Christmas sales push. And he sounded another positive note in adding that demand in Continental Europe was showing signs of improvement after a “fairly quiet” summer quarter – a development which “could help prevent import pressure in the UK”. Chipboard prices in the UK are also lower than those prevailing on the Continent, thus serving as a further disincentive for mainland European suppliers to ship to these shores.
One of the other leading domestic producers pointed to “quite good” demand for chipboard during July and August, but also to a quieter September. Prospects for October appeared more positive, he said, with distribution business normal and manufacturing somewhat weaker. Availability has improved to the extent that, unlike earlier this year, his company is now in a position to take on new customers or to book additional volumes for existing clients.
Another domestic chipboard producer spoke of “reasonably robust” demand before adding: “I can’t say demand [the market] is bouncing, but we have got a full order book.” He agreed that the kitchen furniture market was particularly busy and confirmed that his own company was oversold on flooring at healthy price levels. However, he acknowledged a slight reduction in raw board sales.
Pausing for breath
These positive comments notwithstanding, the UK chipboard market appears to have paused for breath after a sustained period of forward pressure – to the extent that several contacts alluded to evidence that some suppliers have been “weakening” on their prices in recent weeks and that, contrary to the situation earlier in the year, supply is now running ahead of demand. With producers having emphasised their desire to maintain positive pricing momentum, many distributors had been encouraged to buy forward to a larger extent than normal and were now more than equipped in stock terms to deal with current levels of demand, it was argued in one quarter.
However, chipboard manufacturers claim to have seen little evidence of panic buying along the distribution chain earlier in the year. They have also been quick to point out this week that their own stock levels are not particularly high.
One described his company’s inventory as lower than would be expected for the time of year while Sonae UK confirmed that it had reached the end of September with around two weeks’ inventory. It added that company stock levels would fall significantly in the near term owing to the implementation of a five-day maintenance shutdown, postponed following the fire in the thermal oil room at the company’s Knowsley facility in February this year.
As for talk of price weakness, producers insist that prices must remain hardy in the face of significant upward cost pressure. Timber costs are continuing to inflate as a consequence of competition from, notably, the biomass sector; and towards the end of September, it was discovered that methanol prices would be increased for the final quarter of 2007 by around 60% – a move which, according to one chipboard manufacturer, could add 5% or 6% to his company’s production costs. The key question, said a company spokesman, was how much of this increase could be absorbed by manufacturers and how much by their customers given that consumers in many sectors were facing well-publicised demand and cost issues of their own. The furniture industry, in particular, is feeling the adverse effects not only of overseas competition, but also of higher domestic interest rates.
Another UK chipboard producer reckoned from his own company’s perspective that the increase in methanol costs would exceed 60% and add around £3.50/m3 to the finished product price. Methanol suppliers have blamed plant and delivery problems for these substantial hikes and have given chipboard producers to understand that further increases can be expected in 2008.
For some time, manufacturers have been voicing their desire to offer customers as much price stability as possible, acknowledging that a number of consuming industries – notably furniture manufacturing – are experiencing cost and competition pressures of their own.
While insisting that his own company was currently monitoring the market situation, a senior spokesperson for one of the domestic chipboard producers nevertheless ventured: “We [in the chipboard industry] have had tough times and I can’t see the price going backwards. Cost increases will have to be passed on because our margins are so low any way.” Another producer agreed: “We have re-established some of chipboard’s value having started from a low base and so we are not going to be dropping prices too readily.” What he described as “abnormal” cost increases “will have to be passed on”, he added.
Outside of producer circles, the majority of chipboard experts were doubtful whether a price hike in the near term was either likely or workable. Indeed, one contact was prepared to tempt fate by proclaiming that, in light of the far shorter producer delivery times and other factors, there was no scope for introducing further chipboard price increases this year. On the chipboard supply side, the new ContiRoll line installed as part of the £110m investment programme at Egger UK’s Hexham chipboard facility is continuing to run well and could be fully commissioned within the month, the company has confirmed. Of the two older lines at the Hexham facility, one has already been closed and the other is scheduled to be shut down at the end of October.
“We are very happy with the quality of the new line,” a senior spokesman told TTJ. “It is already producing more [chipboard] than the two old lines combined.” The 48m-long, 2.6m-wide line has already opened up new sales opportunities by virtue of the size of board it is capable of producing, he added.
Also on the domestic supply side, Sonae UK’s managing director Tony Hackney confirmed this week that the company is aiming to boost production at its Knowsley facility from a monthly average of around 44,000m3 to more than 47,000m3 per month in 2008.
Returning briefly to the Continental chipboard market, producers’ lead times have remained reasonably stable over recent months while demand has been relatively even at prices generally higher than those operating in the UK. At the same time, there have been reports of shortages and high prices in the MDF market leading to an element of product substitution, including the use of fine-surface chipboard within, for example, the furniture sector.
