Rising costs remain “far and away” the largest threat to the wood panels sector, according to Dave McElroy, deputy managing director of Norbord Europe.

The “biggest hit” in cost terms is from energy, he contended: gas prices have more than doubled between 2004 and 2006 to drive up MDF production costs by more than 20%, while electricity prices have risen to only a slightly smaller extent. He stressed, however, that this issue is faced by manufacturers not only in the UK but also across Europe, and indeed around the world.

Having pointed to significant increases in resin, transport and labour costs, Mr McElroy added that the cost of wood inputs is also being driven up by the impact of competition from the biomass sector. But he noted: “There are opportunities to combat this by the industry doing more of its own generation of heat and electricity rather than buying them off the public grid.” Norbord has already initiated generation projects of this type at Cowie and in Belgium.

Given unremitting cost increases, there is a need for panel producers to continue moving up their prices despite resistance from some customers – notably in the DIY sector, said Mr McElroy. High costs have already “shaken out” a lot of higher-cost production capacity across Europe, he added. While arguing that current price levels fail to fully reflect adequate returns based on current costs of production, Mr McElroy also warned of the dangers of “pushing prices too far” because “this would either cripple customers or invite imports”.

Kronospan’s managing director Ludwig Schreiblreiter feared that, towards the end of this year, UK panel producers may face energy prices 10-20% higher than last winter. Meanwhile, requirements on energy producers to use renewable resources would adversely affect raw material availability to the panel sector. He went on to warn – along with other leading industry figures – that further energy and raw material price inflation could influence production decisions.

Commenting on specific panel products, Mr Schreiblreiter described the melamine-faced chipboard market as “very robust” following many difficult years, partly as a result of decorative product developments aimed at furniture manufacturers and shopfitters. According to Kronospan’s sales director Colin Singleton, healthy demand growth is apparent for MDF skirtings and architraves as replacements for softwood. Driven initially by price, this substitution is now fuelled by product quality, he said.

Norbord’s Mr McElroy pointed to strong MDF demand growth in two areas: laminate flooring; and construction mouldings, where MDF is replacing solid wood and chipboard in an increasing number of domestic applications. For MDF, he envisaged particularly strong product development potential in lighter and custom-built products.

Under-supplied market

The chipboard market remains under-supplied after surviving the summer period without recourse to “silly” prices witnessed during previous mid-year periods, continued Mr McElroy. But having identified an ongoing need to educate customers to pay prices that reflected cost increases, he called into question the ability of certain consumers – notably in the UK furniture sector – to meet ever-higher asking levels.

OSB had recorded European consumption growth of around 20% in first-half of 2006, leading to a reduction in exports to the US and “an orderly absorption of new production in Central Europe”, said Mr McElroy. Buoyed by an industry-backed PR and advertising campaign, he expected a continuing expansion of

OSB applications as well as further growth within existing markets, including timber frame where OSB would continue to gain from the shift in building construction “from the site to the factory”.

Andrew Macdonald, sales and marketing director at SmartPly Europe, estimated UK consumption of OSB at 400,000m3 per year but anticipated significant growth due to the product’s uniformity and ready availability, as well as to the FSC certification offered by the two main suppliers into the UK market – namely his own company and Norbord. He identified flat roofing, hoardings and flooring as major potential growth areas for OSB.

Market-oriented threats

The main threats to OSB tend to be market- rather than product-oriented. “There is the danger of not getting a realistic price in relation to production costs,” said Mr Macdonald. Higher costs are helping to push up all panel product prices but OSB’s upward progress has been slower than that for MDF, plywood and chipboard, he said.

Raw material supply would become an ever more critical factor for MDF producers, according to Malcolm Cowley, GB sales manager for Medite. In this context, Coillte’s recent signing of a purchase and sale agreement for the Clonmel facility potentially “secures a vital element of our wood supply going forward”, he said.

As one of Ireland’s top five energy users, the Clonmel plant has also been hit by gas and electricity increases, as well as by higher wood costs due to competition from the biomass sector. “We have been trying to catch up with price increases but it depends on the market’s ability to pay,” he said. “There is still a long journey to go.”

MDF continues to enjoy strong growth potential – particularly for specials such as FR-rated products used in internal linings/partitions in public buildings, said Mr Cowley. His own company has enjoyed good early success with the Medite Plus range launched last year while sales of Medite Exterior have benefited from restrictions on the supply of exterior grade plywood – for example, in shop fronts.

Chris Sutton, group panel products director at Lathams, anticipates further developments in FR MDF as well as continuing consumption growth for melamine-faced products. If hardwood plywood prices continue to rise, he said, further opportunities will emerge for exterior MDF and for OSB.

Mr Sutton said chipboard capacity losses across Europe would result in lengthening lead times and higher prices for raw board. Looking to the future, he believed the chipboard market would be driven chiefly by added-value products and flooring-grade material.

As a 100% recycled product, ever-tightening timber availability would enhance the prospects of Sonae UK’s chipboard “because we will have no option but to look at more sustainable materials”, said the company’s managing director Tony Hackney.

He said that panel producers’ raw material supply is under threat from a biomass sector favoured by grants and other incentives: “The government believes market forces will regulate the situation but biomass is at an unfair advantage.” The chipboard sector is also threatened by rising energy costs and from differing interpretations of the Waste Incineration Directive, he added.

Reverse substitution

The impact of high energy prices has been even more severe on the MDF sector – with evidence of reverse substitution by chipboard, said Mr Hackney. However, MDF is benefiting from solid demand for established products such as laminate flooring as well as from new product development. For example, a white MDF is due to be available from Sonae by the end of the year.

Scott Golding, director of International Plywood and managing director of its new European sales arm International Panel Products, expects China to impact on the UK’s MDF market. Noting that his own company has imported “a few hundred cubic metres” of Chinese-made MDF, he commented: “It can do a job, but the prices are not that attractive at the moment.” Good quality production is limited to a small number of mills “but things are evolving rapidly”, he added.

China is already a leading supplier of plywood into the UK, accounting for more than 30% of imports in first-half 2006. However, Mr Golding casts doubt on China’s ability to produce plywood at the current “staggering” rate given increasing scrutiny of logging activities and the question mark hanging over the long-term availability of poplar to the country’s mills.