In 2018 the UK MDF market enjoyed what now, in hindsight, looks rather like a purple patch. Demand was good and the price gains achieved were nearer the product’s true value.
Today the picture is quite different. Demand has generally remained fairly stable but prices have softened in the face of European manufacturers increasing volumes of largely standard MDF to the UK as their home markets – especially the timber-hungry German market – have slowed. Timber Trade Federation’s statistics illustrate this trend. In January and February MDF imports were up by only 0.1% on the corresponding two months in 2018, but add the figures for March and in the first quarter imports rose by 4.4% compared with the first quarter last year, to 189,000m3.
One contact said the European imports were creating a “significant amount of oversupply”.
“There’s some additional output from UK mills but it’s significantly the penetration coming from importers,” he said.
Another contact agreed that European product was unbalancing the UK market but he felt that, rather than being a case of oversupply, it was more about price expectations.
“I don’t think there’s that much volume coming from Europe. The problem is always quoted prices and quoted offers; it’s the presence of potentially cheaper material that frightens people. It undermines the whole market,” he said.
It also starts the potentially vicious cycle of traders reducing their stockholdings in the expectation of lower prices, which reduces demand and puts more pressure on price.
The current situation was not a structural oversupply in the UK, he added, but rather a periodic one, “which is nothing new”.
Whatever the volume of European MDF now in the UK, there’s no doubt it is impacting on price. There have been no big downward jumps in price but rather a slow erosion. But no matter the nature of the decline, the result – low prices that provide little fat for a margin – is the same. One contact said prices had fallen by 15-20%, negating the gains made last year and prices were now back down to levels of about 18 months ago.
In recent years there’s been little evidence of the summer “silly season”, where the market became quieter and prices fell as traders chased orders, and the MDF sector is hoping there will be no return of that this year.
Traders would like to think the price erosion has now stabilised, but that doesn’t ease their frustration over the impact of Europeans offloading their surplus in the UK.
“I’m not optimistic at all, mainly because it’s a buyer’s market and the issue is that there are too many importers that are looking just to land cheap product into the UK. That has a consequential impact of screwing up the pricing that exists for those people for whom the UK matters,” one contact told TTJ.
Some contacts also believed that earlier in the year there was an element of stock building because of Brexit and people were now destocking.
“A few of the larger end users bought extra product because of Brexit and now they have to make their way through that before they plan new orders,” TTJ was told.
The lower prices have been eating into manufacturers’ margins. Chemical and energy prices have remained fairly steady but for UK producers their main raw material expense is timber and that cost has been rising.
However, they are not the only ones in the supply chain keeping an eye on the bottom line.
“Some sectors are alright and fairly evenly balanced but others are under pressure. In reality, I don’t think anyone in the industry can afford a price erosion,” he said.
Another contact believed the current supply-led market and softening price could have a material impact on the structure and dynamics of the UK market. Manufacturers, frustrated by distributors/merchants selling on price, may start selling further down the supply chain and direct to customers, he said.
Asked whether MDF manufacturers had the inclination or capacity to take a new position in the supply chain, he said producers wanted to be more in charge of their business and less dependent on distributors.
“They would rather invest in the supply chain and the efficiency in the supply chain than just supporting price through the distributor,” he said.
“There are drivers in the market such as offsite manufacturing. We’re already seeing some people are negating the role of the distributor in the supply chain by offering smaller deliveries and better frequency.”
Other industries’ supply chains had faced disrupters and he thought the distribution market would follow suit.
“It’s unsustainable to deliver feast or famine of product output or realisation of margin depending on things that are happening or being driven by the distribution sector,” he said.
Another contact, however, thought manufacturers selling direct to customers was a consequence of the high supply levels and it was only temporary.
“It tends to happen once product gets saturated. Distributors can’t sell enough for manufacturers, who keep their presses going, so they have to get rid of product,” he said.
And he didn’t believe it would have any long-term effect on the distributor’s role.
“Manufacturers need their distribution because more end users aren’t stocking materials so they need a distributor to deliver almost on a daily basis,” he said.
While supply is dominating the market, UK demand for MDF remains steady, although unremarkable. It was described as “alright but not buoyant”, “pretty stable” and “very quiet”.
“The bottom of the market is far more affected than the top end,” said one contact, adding that the caravan sector and lower end of the furniture market were slow, but this was probably because of competition from cheaper imported product.
Sales of value-added products, however, are bucking that trend, especially MR MDF and mouldings, which are taking market share from solid timber as builders realise the product can save time on installation and finishing. One merchant said MDF skirtings, architraves, casings and linings were “flying off the shelf” and sales volumes continued to grow. This trend is also illustrated by the recent news from Arbor Forest Products that since it launched its first MDF mouldings production unit five years ago it has posted record sales of the product every month.
Most contacts believed the continuing uncertainty over Brexit was affecting sales and that there would be little change until the UK’s exit date was confirmed. And, now, of course, the imminent change in prime minister was creating more uncertainty.
One contact, however, believed people were fed up and past caring about Brexit and so likely to start spending again irrespective of the indecision over the Brexit date and deal.
Some contacts thought the uncertainty was having little impact on the new build market, although one thought housebuilding was not as buoyant as forecasts suggested.He was pinning his hopes on the fact that the government’s and local authorities’ recognition of the need for more homes was on record so eventually housing starts would have to increase.
It was generally agreed, however, that the Brexit uncertainty was stalling larger projects and causing households to put RMI on hold.
Another contact identified other issues at play. “The UK is not a growth economy but it’s pretty static so the challenges that MDF has pre-date what’s happening this year,” he said. “The UK high street is a significant consumer of MDF in various forms and fashions and it’s well-documented what’s happening there.”
He predicted there would be no change for MDF over the remainder of the year, at least, unless there was a sudden uplift in demand in a significant market – perhaps the US, Turkey or Continental Europe – or tightening of raw material supply. The mills’ summer holidays were already factored in to forecasts so production output would only be affected if manufacturers made some changes to their planned downtime.
“We might see some extended maintenance or holidays brought forward by European mills,” he said.
In contrast, another contact was optimistic about the forthcoming months, believing that, despite the current situation, the fundamentals of the UK market remained strong.
“I am convinced things will pick up in the second half,” he said. “Brexit has delayed decisions but the general underlying demand hasn’t gone away. The basic factors for demand exist. If you take Brexit out and look at the economy, we have full employment so labour is needed and people will still come into the UK, we have wage inflation, a need for new housing and a need to refurbish the old, existing housing stock. For the past nine months wage inflation has been higher than price inflation so in real terms people are getting richer. Also, the UK population increases by about 200,000 people every year and that won’t change with Brexit.
“There’s nothing wrong with all that; people just need the confidence to spend money again.”
