Summary
¦ Rising costs are pushing up chipboard prices.
¦ UK demand is buoyant.
¦ Lead times are normal, except for T&G which is in shorter supply.
¦ It is estimated that 4 million m³ in European capacity was closed in 2009-10.
¦ European producers are selling very little to the UK market.

Chipboard price increases have become “almost a monthly event” in the UK, while several distributors have been increasing their asking prices “virtually on a weekly basis”, TTJ was told this week.

Significantly higher price levels on the Continent, rising production and transport costs, decent levels of domestic demand, and the tightening availability of many chipboard products have been combining to provide manufacturers with the ammunition to push through significant increases on a seemingly ever more regular basis.

At the start of this year, prophets of doom were warning that the economic downturn would bite even more deeply in 2011. To date, however, “the sense of caution and lack of confidence are not reflected in the volumes [of chipboard] going out the door”, said one leading UK producer. “The market is fairly healthy.”

It seems double-digit price increases are no longer a source of surprise for the market. One UK manufacturer said this week that a February increase of 6-8% in its building products prices was due to be followed up with hikes of “12% or more” in early April. In other parts of its chipboard product portfolio, the second quarter is scheduled to begin with increases of around 10% in certain instances, according to a spokesperson for the company. But he was quick to add: “Even with these price increases, we are still not covering the full impact of the cost increases. There is still a certain amount of catch-up to be had in 2011 given the costs thrown at us in the last 12 months.”

A counterpart at another UK production operation said that his own company had implemented “double-digit price increases across the board” in mid-January and that, over the course of late March and early April, further hikes averaging around the 10% mark would be imposed on raw board and melamine-faced chipboard. He described overall chipboard demand in the UK as “buoyant”, adding that sales volumes in the first quarter had been “double-digit percentages” higher than for the corresponding period of last year.

But even against this largely positive backdrop, one or two industry experts said some companies have been prepared to offer chipboard to the UK market at prices that are “out of step with what is generally viewed as required levels”.

Chemical costs

In terms of costs, chemicals have been a particular concern during the first quarter of 2011, with one UK chipboard producer pointing to “double-digit” increases for methanol and urea since the start of the year. He also said that his energy bill in March was around double the cost of that for the same month last year.

A fellow UK chipboard producer said that, when comparing the first quarter of 2011 with the final quarter of 2010, his company’s melamine costs had jumped around 30% while the bills for methanol and urea had climbed some 25% and 15% respectively. Transport and haulage costs had also risen around 15% since the beginning of 2011, while wood costs had surged some 40% higher over the last 12 months, he added. The same contact also reported a slight drop-off recently in the availability of recycled material.

While cost increases are widely pinpointed as the major driver behind seemingly relentless chipboard price rises, one domestic producer also acknowledged that “tighter availability will help in pushing the increases through”. And he emphasised the importance of customers now passing on chipboard hikes via their own pricing schedules. “Customers are struggling to get this wave of increases through. We keep telling them it is something they must do because these waves haven’t stopped yet.” Global uncertainty – exacerbated by recent events in Japan, New Zealand, the Middle East and North Africa – tends to result in higher prices across the commodity spectrum, he pointed out.

Indeed, none of the industry experts contacted this week was anticipating an end to chipboard price escalation any time soon.

Supply and demand balance

Domestic demand for chipboard is broadly in kilter with supply, despite the fact that, in the first quarter, the UK has not witnessed full capacity utilisation. Lead times on most chipboard products appear to be within normal tolerances – with the exception of T&G, for which lead times are as far out as 12 weeks, depending on the producer. A major upturn in domestic T&G orders “would be a problem”, several contacts said, because availability is showing every sign of becoming tighter.

On the Continent, recent capacity cuts have fuelled an upward spiral in prices which has been even more precipitous than that seen in the UK. It is estimated that around 4 million m3 of western European chipboard production capacity was closed in 2009 and 2010 alone. Price acceleration has been particularly rapid in countries like Germany, where the post-downturn economic recovery has been robust and where, therefore, material shortage fears have become especially acute.

In this context, a combination of capacity reductions and price increases in Germany has ensured a return to the black for major chipboard producer Pfleiderer since the beginning of this year. “The business development of the group came in above the company’s own expectations in the first two months of 2011, not least due to the effectiveness of the operational restructuring now becoming apparent,” the group has stated.

Industry capacity

The scale of the supply issues in the European market traditionally would have prompted producers into considering capacity expansions. However, “poor returns” on chipboard investments over recent years have helped dissuade most companies from this course of action, according to a senior figure in the UK production sector. “Nobody is adding capacity because they haven’t made the returns or because they fear they are not going to have the wood to feed it,” he said.

The price differential between the Continent and the UK has extended to between 10-20%, despite substantial price increases implemented on this side of the Channel. As a result, UK imports have been restricted almost exclusively to products not produced in this country. “These products are relatively price insensitive and so the imports are likely to carry on at around current levels,” TTJ was told. As a general rule, however, “UK manufacturers really have nothing to fear from imports at the moment”.

One leading company supplying into the UK market has orchestrated two price increases – 6% and then 5% – since the start of this year. However, with the financial returns available from Continental customers at least 10% higher than those paid by in the UK, a spokesperson said that flows to the UK are under severe competitive pressure. “Any non-standard item of chipboard is short on the Continent due to capacity being taken out,” he said. “Chipboard is not there in major quantities so people will have to pay the price to get it. Supply is more volatile and is changing everything.”

UK exports

Helped by the cross-Channel price gap, UK chipboard producers have continued to secure business not only on the near Continent but also, in at least one case, outside of Europe.

In a final look back at 2010, Norbord has confirmed in its latest financial results that its chipboard production volumes in Europe edged 1% higher last year. “European panel markets showed increasing strength throughout 2010 as housing construction picked up and repair and remodelling demand remained robust,” it noted. In the UK, where the majority of its European assets are located, “housing starts increased by 30% over 2009” compared to 8% in Germany. European chipboard prices ended the year 5% higher to reflect “the recovery of higher input costs”, Norbord also pointed out.