Summary
• The run-up to Christmas was busier than expected.
• Chipboard prices are rising in response to higher raw material costs.
• The euro/sterling exchange rate is deterring imports to the UK.
• There is still little demand from the construction industry.
• Traders are cautious about business in 2010.

A busier than expected conclusion to 2009 was followed by a misfiring start to 2010 for the chipboard trade, not least because of the severe winter weather. But with a subsequent improvement in demand, coupled with ever-rising costs, producers believe that the recent run of price increases will continue in the coming months.

More than one domestic producer said that trading activity exceeded expectations in December last year. A senior spokesperson for one such company said: “We were still getting enquiries for board right up until Christmas Eve.” Another revealed that his company had dropped plans to take downtime over the festive period because its stocks had dwindled to levels that threatened service. In 2008, he recalled, the company had opted to take “extensive” downtime over the Christmas period.

This momentum was disrupted by the cold and snow in late December and early January. The freezing conditions hit chipboard manufacturing operations, with one domestic producer reporting that temperatures as low as -16ºC had led to “burst pipes around the plant” and to problems on the production line itself. At the same time, many customers declined to place orders in the face of logistical and other issues.

No clear picture

Partly as a result of the varying approaches to production adopted over the festive period, there is no definitive picture for stocks. One chipboard manufacturer said that regular periods of non-production had extended the company’s lead times in the UK from around a fortnight to nearer four to five weeks. Another said that lead times on melamine-faced chipboard (MFC) and raw board now stood at a minimum of three weeks following a period of downtime for planned maintenance at Christmas; no further downtime is anticipated between now and Easter, he said, given the decent levels of demand for both products.

The latter contact also said that all products made in January went out to customers in that same month, and that this same pattern was likely to be maintained in February and March. “Our stocks are not yet back at the levels we would like but they were OK for the activity levels in January,” he said.

Another domestic producer said his chipboard inventory was on the low side but, unlike the period prior to Christmas, was now sufficient to avoid service disruption.

UK construction

The snowy start to 2010 did nothing to improve activity in the UK construction sector, resulting in an ongoing dearth of enquiries for T&G. By contrast, most producers are reporting reasonably strong sales of MFC and raw board; however, they are still concerned that some of the business lost in early January will not be recovered – for example, from furniture retailers whose post-Christmas sales were undermined by the weather.

Of course, the snow in December and January also impacted on the raw material supply chain: forests became inaccessible and logging activity declined significantly, while even those logs that were extracted proved to be more difficult to process. A number of sawmills duly curtailed their production, thereby introducing an unwanted kink to the supply pipeline.

With availability already constricted by pressure from the biomass market, chipboard manufacturers have been confronted with bigger price tags on their timber supplies. One domestic producer said that his timber costs had increased “dramatically”, partly because reduced availability had forced him to purchase a more expensive raw material mix. And producers’ timber stocks are low enough in certain instances for supply disruption warnings to have been issued to their customers.

Producers are also being saddled with higher costs of resin, melamine paper and energy at the same time as hauliers have been seeking to impose higher rates.

Significant price increases

In response to these diverse pressures, chipboard manufacturers have announced significant price increases over recent weeks. A senior spokesperson for a company which has introduced increases of between 5-8% said: “Everybody was expecting it. People are now more willing to stock to try to avoid higher prices [expected in the future].” Customers would be wrong to assume that chipboard manufacturers will be prepared to return to the days of producing loss-making product, he added.

The evidence provided in 2009 tends to support this theory, with several European manufacturers shutting capacity because it was uneconomic for them to continue. Furthermore, the lack of plans to develop new capacity will assist efforts to return value to the chipboard market, it is argued.

A domestic producer which recently added 3-7% to its chipboard prices said distributors have welcomed the move because of this need to recover lost value. “We don’t want to unbalance a fragile market,” he added, “all we are looking to do is pass on the costs impacting our business. There is no profiteering here – it’s just that we aren’t in a position to absorb any additional costs.”

Price rise rethink

One domestic producer said that his company had been planning to hold its prices steady for January but that the sudden spurt in timber costs had forced a rethink, leading ultimately to the introduction of increases of around 5% across his chipboard product range. Another manufacturer, which implemented price increases of a similar scale on January 1, is warning its customers to expect further significant increases, with the next rise likely to be made in the second quarter.

Towards the middle of last month, a mainland European producer announced that it was upping its prices for shipments to the UK by an even more substantial 6-8% to take account of the added problem of the strength of the euro against the pound. The exchange rate has served to decimate imports over a period of many months although, more recently, volumes – mainly from western Europe – appear to have stabilised, albeit at these low levels.

The euro/sterling exchange rate became a particular focus at the start of the year because it is a time when many contracts come up for renewal. According to one source, the increases had been largely accepted by customers, most notably in relation to “specials” such as custom sizes.

The same contact predicted that further increases would be implemented at some point in the second quarter, with Easter likely to affect the timing to some extent. One domestic manufacturer also said his company would probably look for increases – likely to average around 5% – in the second quarter. And another producer told TTJ that an upward move could be made as early as March; the increase would be limited to single percentage points, he added, to enable its assimilation within the market place.

Despite the slow start to 2010, there is a far greater measure of optimism within chipboard circles when compared to early 2009. “I was always hopeful for the first half of 2010 and that remains unchanged,” said one producer. At the same time, however, he is worried that post-general election austerity programmes could lead to more difficult trading conditions in the second half.

Tough year

Some, however, are still damning 2010 with faint praise by saying that “it won’t be any worse than last year”. The UK has officially emerged from recession but this statistical nicety is not reflected in the real world where, for example, “demand from the construction sector is still just awful”. One contact said: “The consensus is that it is still going to be tough and everyone has to be careful about over-trading and bad debts.”

Another chipboard producer shared this view. While 2009 “was not as bad as we had expected for bad debts”, there are fears of a “storm brewing” and of a significant rise in bad debts during the course of this year.