Summary
• Chipboard production in the UK is 20-30% below normal.
• Producers continue to take downtime and longer periods may be needed around Christmas.
• At present they are absorbing the higher energy and resin costs.
• Forward buying has virtually disappeared from the market.
• The MFC market has been relatively stable.
• Kronospan has unveiled a new melamine design range.

Any lingering hopes of an autumn upturn in chipboard demand were effectively snuffed out in September and October as all panel board markets felt the effect of continuing adverse economic news.

According to the consensus, chipboard activity in the UK is perhaps 20 or 30% below the norm for this time of year. In response, many of Europe’s leading producers have continued to take downtime in a bid to balance production with orders and to prevent a runaway downward price spiral.

From across the Continent, there are reports and rumours of lines being stopped for many weeks or completely. A leading domestic manufacturer repeated his earlier forecast that, given the current market conditions, casualties are inevitable within the European panel production sector. But, on a brighter note, he said such a loss of capacity should help to ensure that the turnround in the market is quick when it arrives.

Focusing on the UK, a leading producer said he had run his chipboard operation throughout October but was not ruling out the possibility of a production break during November. Another said he would be implementing a 10-day production pause at the end of October and into early November. Both joined other leading producers in saying that longer periods of downtime were almost inevitable at Christmas.

Strategic downtime

“Downtime is still very much part of our strategy,” said one. “Costs are still increasing and the market will not allow us to pass them on. At the moment, you have to ensure your cost management is spot on – that’s critical.”

While a number of Europe’s chipboard producers are on fixed energy contracts, one who is not said that the recent cold snap had pushed his energy costs some 40% above their level of this time last year. And another producer said his resin costs had increased by the equivalent of £4/m³ for the final quarter. He said that, despite falling oil costs, there is still “a lot of volatility in the resin market” such that “it is very difficult for us to forecast where we will be at the end of this year, let alone going into next year”. Several producers expressed the hope that the falling trend in oil costs would translate into lower resin costs by early next year. “Current indications are of no change in melamine and methanol but of the urea price possibly coming down,” said one.

Despite the raft of production and cost controls imposed by the chipboard manufacturing sector, there has been evidence of price softness in many parts of the business – a development attributed in one quarter to “some manufacturers trying to turn stock into cash”. And he added: “We have tried to resist doing this. The industry has put a lot of effort into building more value into the market and we don’t want to set it back five years.”

It should also be noted that, despite the bank bail-out plan, customer confidence remains at vanishingly low levels and, as a result, forward buying or purchasing for stock has all but disappeared from the market – at least for the moment. “Our customers are just buying what they need and their customers are ordering only what they need,” said one chipboard producer. “I don’t think there is much stock out there at the moment.”

Segment specifics

In terms of product segment specifics, the melamine-faced chipboard market has been relatively stable despite slower demand from, for example, kitchen and bedroom product manufacturers, but raw board and T&G flooring prices have been more harshly treated – not least because of the sharp decline in construction sector activity. And despite having held up reasonably well in the last two or three months, demand for some of the more specialised forms of chipboard have also begun to come under pressure, TTJ was told this week.

In prefacing Norbord’s recently-released results for the third quarter of this year, the company’s president and chief executive officer J Barrie Shineton also stressed that the woes of the construction industry had contributed greatly to the tough market conditions experienced by panel producers on both sides of the Atlantic. As a consequence, Norbord’s European panel board prices had declined 7% on average in the financial period under review when compared with the second quarter of 2008.

Housing starts in the UK “have fallen 40% year-to-date as mortgage lenders tightened credit terms and limited mortgage approvals”, he said in his late-October statement. “The European business is also disproportionately impacted by rising resin and global energy prices because Norbord’s European products are more resin and energy intensive.” Initiatives designed to address these cost pressures have included the permanent closure of a chipboard line at Genk in Belgium during the first quarter of 2008 and the installation of biomass heat energy systems at both Genk and Cowie in Scotland, he said.

Two more difficult years

Mr Shineton believes “the next two years will be difficult for the building materials industries” in both North America and Europe. But on a more positive note, he added: “The UK market is not handicapped in the same manner as North America by high inventories of new or used unsold homes. There is also a systemic lack of available housing in the UK and this pent-up demand continues to grow. Combined, these factors suggest that there may be a faster recovery in housing and panel board demand once credit conditions correct and financial markets stabilise.”

Other producers tend to share the view that a near-term improvement in market conditions appears unlikely. Several also point out that the impact of this downturn can be felt not only among manufacturers and their customers, but also along the supply chain where downtime has also become a fact of life. Not least as a result of the slump in construction activity, “we are certainly seeing a reduced availability of sawmilling byproducts because the sawmills are quieter”, TTJ was told by a leading domestic chipboard manufacturer. This drop-off in sawmilling has led in turn to a reduction in harvesting activity – and therefore to a decline in the raw material available from this source too, he added.

Sonae UK is among a number of producers to be adopting a positive approach to these difficult circumstances by the unveiling in early October of a new melamine design range for the distribution sector – an area in which the Knowsley operation has not been prominent in the past. “We are continuing to innovate. You can’t afford to stand still in this sort of market, ” said a spokesperson.

If anything, market conditions in other parts of Europe are worse than on this side of the Channel. Continental producers are continuing to export to the UK but “a lot of this tends to be added-value product”, was the story from a number of sources, with one noting that imports of melamine-faced chipboard have fallen by around a third in recent times. The volume of raw board imports has “dropped right off”, because of a combination of factors, including the lack of demand in the UK and the dwindling value of the pound in relation to the euro.

Transport costs

In addition, transport costs have been increasing at a time of softening product costs, thereby making the transport element an even larger proportion of the overall cost and rendering business even less attractive. As one industry expert put it: “A lot of Continental producers would simply like to move material – whether to the UK or anywhere else. But chipboard isn’t travelling well at the moment.”

That said, one of the domestic producers has been exporting reasonable volumes of chipboard “beyond Europe” – although it is acknowledged that the business is not winning a huge margin.