While leading domestic producers have been striving to hold firm on their prices, there can be no mistaking the weaker market conditions bearing down on the MDF sector as it heads into its traditionally difficult summer period. A senior spokesperson for one of the big three home producers described market conditions with the decidedly unseasonal analogy: “The ice is getting thin.”

Headline MDF prices may not have been lowered in some instances, but a combination of factors were blamed for a downward market drift. These included discounting from as far back as April this year; cash-back deals; take-up of very low margin business by some stockists and distributors; as well as de-stocking by distributors, some of whom are reportedly looking for a way out of an MDF market they no longer regard as viable for them. Apparently some com-panies are refusing to take an order for MDF unless it forms part of a wider package.

None of the trade sources contacted this week was expecting these difficult market conditions to lift to any great extent before the end of August. Lead times are almost non-existent for a wide range of MDF products/specifications and prices are under pressure, particularly with regard to the

6-30mm merchant grades. Several contacts said that light board was taking a share of the standard board market but regretted that high levels of competition had “devalued” this premium product.

Production cuts

Most traders are urging producers to “hold the line” on price and to take downtime if this proves necessary. Summer production cuts by domestic manufacturers would be widely welcomed within the UK trade as a means of overcoming the prospect of “too much supply chasing too little demand”.

Producers appear prepared to “tough it out” for as long as possible. According to a spokesperson for one domestic manufacturer, his company had experienced tougher MDF market conditions heading into the summer period. He also insisted that price reductions were by no means the best response to current circumstances. “You only have to look at retail to see that consumers are not excited by low prices,” he said. “We are in the same boat – manufacturers and distributors won’t excite business by dropping prices.”

He suggested that the UK might look to emulate producers in the US and mainland Europe who, when market conditions became unfavourable, simply opted to stop production for a while. It was widely perceived, he added, that domestic MDF producers were unwilling to consider shutdowns as a means of reducing supply during the summer months but this was “increasingly becoming a fallacy”. And he added: “Our intention is to hold price as long as we can – we can’t afford to drop prices.”

Other contacts in the trade argued that higher timber, resin and energy costs were likely to prevent the major domestic producers from making swingeing price cuts. One commented: “They won’t want to sell below variable costs, and prices are already bordering on that. I think capacity will have to be taken out first.” Indeed, it was suggested that downtime has already been taken in some quarters.

According to another of the leading home producers, lack of consumer confidence was having a dampening effect on retail sales and industrial sentiment as a whole. Everyone appeared to be suffering the effects – including the DIY sheds.

Others said that the general economic malaise has been apparent in large parts of mainland Europe. For example, laminate flooring sales suffered across most of the Continent in the first half of this year, creating a large amount of available capacity.

Three options

&#8220The market is just trundling along at a low rate. I don’t think the volume is out there, and so severe options are not necessarily guaranteed to work”

Against this backdrop, a producer spokesperson said his company would look to achieve the best balance between the three options available to the MDF manufacturing sector: reducing prices; “investing” in downtime; and selling offshore. Arguing that his company had held its prices to date and that any move to reduce them during the summer months would depend on a range of issues such as stock levels, he said price reductions generally secured only temporary market share and could turn into something of a “slippery slope”. At the same time, the high cost of the capital equipment could make even temporary shutdowns an expensive option.

“The market is just trundling along at a low rate,” he said. “I don’t think the volume is out there, and so severe options are not necessarily guaranteed to work.”

Demand from many end user industries has been lacklustre at best and downright poor in the case of the furniture trade. Lack of business for the DIY sheds has also had an adverse impact on demand for MDF flooring. Indicative of the ongoing competitive nature of many areas of the MDF market, even the more niche products are coming under threat. For example, Norbord has confirmed that it is to close its veneered MDF line at South Molton at the end of this month.

Several companies have reported an upturn in veneered MDF enquiries as customers of the South Molton operation seek an alternative source of supply. However, competition in the veneered MDF market could be about to increase given this week’s news from a well-known timber trading company that it was about to take delivery of a sample shipment of veneered MDF from China. Confirming that the product would be “competitively-priced”, a spokesperson acknowledged that the quality of Chinese material had always been a key issue in the past. “We have imported product from this mill before and we think it’s acceptable to the UK,” he added “But we are still choosing to go down the sample route.”

Chinese exports

He did not rule out the possibility of China exporting raw board to the UK within a year from now although he recognised that quality would dictate the extent of any market penetration. He said: “The Chinese are making huge volumes for their domestic market, so it wouldn’t take much of a downturn in home demand for large quantities to go into the export market.”

A couple of the senior manufacturers interviewed this week identified “some glimmers of hope” for the MDF market, notably the housebuilding market and the strong order files enjoyed by some shopfitting and kitchen businesses. In addition, several producer and distributor contacts reported reasonable order levels for exterior and FR MDF and for MDF mouldings. For domestic manufacturers, another positive aspect of the current market has been the dearth of imports from overseas producers other than those with a long-established presence in the UK, although there were reports of some “aggressive” pricing by at least one western European producer active in the UK market.

Global demand

And, of course, manufacturers can point to underlying fundamentals to justify their hopes that market conditions will improve in the autumn, not least the strength of global demand for the product and the lack of new production capacity slated to come on stream in the near to medium term. Arguing that anybody with experience of the MDF trade should not be in the least surprised by weaker market conditions heading into the summer, a manufacturer spokesperson insisted that the balance between supply and demand was still “delicately poised” and that any significant upturn in order levels would give the market a decided boost.

The domestic MDF market may have left well behind the bullish period of 2004 when year-on-year price increases topped 20% and when lead times were sufficiently encouraging for manufacturers to continue production over the Christmas period.

But despite the loss of market momentum in early 2005 and the even weaker trading conditions of the early summer, at least one manufacturer was refusing to rule out the possibility of a return to higher prices before the end of this year.