Undoubtedly, this has been a year of dynamic change within the chipboard sector. Ever-tightening availability has combined with ever-intensifying cost pressures to alter the market landscape completely. And with demand continuing to exceed supply, the following comment from a UK chipboard industry figure should come as no surprise: “Expect to see plenty of price increases early in the new year.”

A senior spokesperson for a domestic chipboard producer confirmed that his company had achieved record production in November and was still very busy in early December. There had been a flow of enquiries from a wide range of prospective new customers while many traders were seemingly “desperate for product”. Many of the company’s customers with an agreed chipboard allocation had asked for additional volumes only to be told that no more could be made available. “We are at capacity, basically,” he said.

Similar comments were made by another leading producer figure: many regular customers were sufficiently busy to require volumes above and beyond their allocation, but no further material could be available to them. Having confirmed his company would follow the normal pattern of producing chipboard over the Christmas season, he added that some customers were opening up over the festive period specifically to take in supplies of chipboard. While running plant over Christmas normally allowed the company to build its inventory for January and February, “I don’t see that this year at all”, he said.

Delivery times

Delivery times have been extended to the point of impracticality in some instances: for example, one supplier maintained that he had “nothing available for the time being” and that, if pressed, he would have to quote a delivery time of May next year. In many instances, lead times were now being expressed in months rather than days or weeks, another commented.

Availability is likely to remain short and producers are warning customers to plan their supply requirements for the coming months. Having acknowledged some difficulty in imposing price increases during the early part of 2006, one producer spokesperson added: “There is now more realism around – based on timber shortages and the absolute acceptance that, without supply, you can’t sell anything. Buyers must realise that they have to lock in to reliable suppliers.”

The struggle for supplies has also led some customers to make emergency purchases from the Continent at high prices. Overall, however, UK imports of chipboard have remained at relatively low levels because Continental producers are still busy meeting healthy demand at home or in export markets closer to home. Furthermore, producers on the European mainland are struggling with timber availability and cost pressures which appear unlikely to relent in the foreseeable future. As a result, some have been forced to push up their prices to levels which make their products uncompetitive in the UK. Some panel capacity on the Continent has been shut down owing to a lack of raw material, it was said this week, while forecasters are predicting that timber costs in Germany will soar by as much as 40% during the first half of next year.

In the UK, this year’s trend towards regular price increases continued into the fourth quarter, with one producer raising its raw board, melamine-faced (MFC) and T&G prices by 15-18% for November and December. “This is getting us into a position to cover our costs to the end of the year,” a senior spokesperson told TTJ this week.

January price rises

Several domestic chipboard suppliers are already proposing to implement further hikes for January. One producer confirmed a 7-8% price increase on raw board and T&G while another supplier was planning increases of around 10% on some of its benchmark chipboard products. Another manufacturer is planning to raise its P5 price by around 5% with effect from January 1 – the fourth increase in a year. One producer contacted this week described the P5 price as “still way under what it should be”. Another said that the T&G market remained “well under-valued” and would require a further 20% upturn in price to become a reasonably attractive market.

Demand and prices for MFC have continued to improve, partly on the back of decent demand from the shopfitting sector. With other added-value products attracting healthy orders, there is evidence of production capacity having been switched away from raw chipboard in search of higher-margin business. However, one of the leading producers maintained the margin on raw chipboard was better than on MFC; another contended that the P1 price had leapt almost 80% over the past 15 months but that production priorities were being guided by commitments elsewhere.

According to a leading UK producer, customers in the furniture industry – including some major players – had been slow to recognise the sea-change in the chipboard market. They had expected prices to follow normal cyclical patterns and had “underestimated the lack of supply”. As a result, many were now “offering silly money” for furniture-grade material in order to obtain security of supply.

Market dynamics

Summing up 2006, one chipboard producer expressed surprise at how quickly the market dynamics had changed: reluctance to accept increases at the start of the year had given way to a general understanding of the need for on-going price progression. “Retailers are coming to terms with the fact that they will have to put up prices to their customers,” he noted.

For chipboard producers, however, this year has been less about returning to profitability than about securing sufficient price increases to cover spiralling costs. Methanol/resin prices have been a major issue over recent months, while problems surrounding the rising cost and reduced availability of timber appear unlikely to diminish in the foreseeable future.

Although the pressure applied by energy costs is perhaps less intense than earlier in the year, this issue has not disappeared. In the main, chipboard manufacturers have locked themselves into fixed energy contracts as insurance against massive energy cost peaks such as those witnessed last winter. By opting for energy cost stability rather than gambling on spot movements, producers argue that they have enabled their own organisations – as well as their customers – to budget more effectively.

While this year has been dominated by efforts to keep pace with costs, producers also hope that they have been laying the foundations for a necessary return to greater profitability in 2007. As one contact put it, there is a need to introduce greater sustainability into the chipboard market such that producers can make the profits necessary for reinvestment.

Investment

Of course, a major production initiative is scheduled to come to fruition in 2007, namely Egger UK’s £100m development of its Hexham facility, which includes the installation of a ContiRoll continuous production line. According to a company statement, the major part of construction is due to be completed by the end of 2006 and the first wood-based panels are expected to come off the line by next spring. Egger said a modular approach has helped to speed up construction.

Several industry sources suggested that the true impact of this development would not be felt within the market until well into the second half of the year. With the new line replacing existing capacity to some extent, and with the autumn decommissioning of Norbord‘s old chipboard line at South Molton, the widely held view is that the new Egger development will not significantly change the market fundamentals. “There is a genuine shortage of capacity and the Egger development is not going to alter that situation,” TTJ was told.

With new capacity taking years rather months to carry from planning to production, and with competition for raw material likely to intensify, the fundamentals look set to remain positive into the longer term.