Summary
¦ Producers are raising prices to offset higher costs.
¦ Resin costs are expected to rise again.
¦ The raw board market is stable and MFC sales have held up.
¦ Imports to the UK are still low.
¦ The sector is concerned about the impact of public sector cuts.

UK producers are generally insistent that, at least for the foreseeable future, there will be no discussion with customers about the possibility of lowering chipboard prices. Their determination to hold the line on price – and even to raise values whenever feasible in the context of market conditions – continues to be driven by the relentless upward march in their costs.

In the panels sector, price increases in the heart of the summer are something of a rare event. So perhaps the best reflection of how cost pressures are impacting on UK chipboard producers is that one introduced a 6% increase across its product range in July; this came on top of a hike of around 5% earlier in the year.

One producer is already alerting customers to the “likelihood” that prices will be raised again in September or October – “probably by a further 5%”. And another prominent supplier of the UK market indicated that a September price increase of 2-3% is envisaged for his company’s P2 chipboard. “Everyone is putting their prices up,” TTJ was told. “It is good that there are no summer offers – that can only help the market to get stronger.”

Recent and planned increases do not mean that chipboard producers aren’t mindful of the financial pressures faced by many of their customers. Having advanced his prices by up to 10% in May, one chipboard manufacturer said that “in principle” there will be another upward move in the autumn – before quickly adding that this will depend on demand at that time. In other words, producers recognise they must remain aware of their customers’ ability to pay when looking to offset higher costs with chipboard price increases.

Little and often

As regards the approach taken to raising chipboard values, producers both in the UK and in Continental Europe generally favour “little and often” rather than “frightening” buyers by pushing for “double-digit percentages” in one go. That was the view of the UK representative of a mainland European producer which is planning to raise its prices by around 5% during the next round of increases. “But we still need to offset costs, and so there will be at least one more price increase before the end of the year – and there could be two. The first may well come in September.”

Sellers “are not going long on prices because costs are difficult to call and the simple availability of timber is difficult to call too”, he added.

According to one domestic producer, recent chipboard price increases have done little more than balance out the cost additions. With the arrival of what was described this week as “a peak of availability”, timber costs “have levelled out” – albeit “at a high level” in historical terms, in part because of ever-rising demand and competitive prices from the biomass sector. At the same time, the chipboard sector is enjoying a peak of production efficiency given that incoming wood supplies are generally drier than at other times of the year. “So things can only get worse from here on,” warned one contact. “We have already been told that our timber costs will rise again in September.”

Another producer said that timber will remain available going forward “but only for those prepared to pay the price”.

Resin price increase expected

Although no details have emerged to date, resin costs are expected to rise again during the third quarter of this year while the slight easing in petrol prices at the pumps has not been reflected in chipboard haulage costs. And one of the domestic producers expressed particular concern – and some puzzlement – at the recent course of energy prices: normally significantly lower in the summer months, they “are still almost double what we had expected” for this time of year despite having dropped back recently. Another producer drew attention to the papers used in the production of melamine-faced chipboard (MFC), the costs of which have risen by around 15% over the last four months, he calculated.

All of these cost pressures have continued to weigh heavily on producers at a time when, according to one contact, demand for chipboard has recorded its first summer dip since the mid-1990s. In his own company’s experience, he said, the past five years have brought no appreciable drop-off in orders over the summer, whereas this year there has been a reduction of around 20% in sales volumes. This could be attributed to “a certain amount of trepidation” among customers regarding business prospects or to chipboard users being less prepared to run with significant stocks during the summer when many companies either close or rein in their production activity.

Feedback indicates a generally stable UK market for raw board. Meanwhile, sales of MFC “have held up well” and are reported in some quarters to be showing growth. Views on the T&G flooring market are decidedly mixed, with one expert seeing signs of improvement while another described sales as “lifeless”, adding: “We have seen a slight increase in private sector building work but the emergency Budget has created some nervousness about public sector spending.”

Sales volumes

When combining all forms of chipboard, a leading domestic producer estimated that his sales volumes are trailing pre-recession levels by perhaps 5-8%. For the moment, however, producers seem relatively comfortable with the balance between demand and their own stocks/production plans. One has just completed a scheduled week-long period of maintenance “and couldn’t afford to stop for any longer” given its current order list, a spokesperson said. Another chipboard manufacturer will stop production shortly “for maintenance – and for no other reason”, said a senior figure. This will not affect lead times, he added, because the company will be running at full production ahead of the shutdown which will last about a week.

Although pressure from chipboard imports is generally restricted to specialist items, the recent appreciation in the value of sterling is understood to have prompted some overseas producers to look with renewed interest to the UK market. According to one domestic producer, in the recent past material has been offered at prices up to 10% below prevailing levels in the UK – a “scary” set of affairs, he said, given the freight and currency costs that would be associated with such business.

However, another domestic producer said that these transport costs, as well as limited production and generally rising price levels in many countries, are likely to ensure that volumes coming to the UK are not so significant as to disturb the balance of the domestic market. Having estimated that chipboard prices in Continental Europe are some 5-6% higher on average than those prevailing in the UK, another contact said that chipboard is “quite a low-value commodity” and that, as a result, transport costs are a far larger factor than for other panel products when assessing the viability of shipping from mainland Europe to this country.

Matching expectations

Asked to sum up chipboard developments thus far in 2010, the consensus among contacts was that the market has matched or even exceeded expectations without ever truly catching light. “It’s been a reasonably good and stable year compared to how bad it could have been,” said one producer.

But despite the lift provided by UK economic output figures indicating an unexpectedly large 1.1% growth in the second quarter (including a 6.6% leap in the construction sector), most chipboard specialists are cautioning against over-optimism. “The big question is how cuts in public sector budgets are going to affect spending,” said one contact. “But it’s more likely to hit us next year rather than this year.”