Summary
• Demand is well below expectations for this time of year and prices have weakened.
• Kronospan and Sonae have been taking downtime.
• Manufacturers’ costs continue to rise.
• The construction downturn means there is little demand for raw board and T&G.
• The exchange rate is deterring Continental chipboard manufacturers from selling into the UK.
TTJ’s September chipboard reports from the last three years reveal the scale of the market’s volte face. The ninth month of 2006 was characterised by abnormally strong sales activity and by significant price increases. Twelve months later, demand was failing to reach the same heady heights and experts were reporting “a small injection of nervousness” in the UK market place. But even in September 2007, manufacturers were resisting any suggestion that this softer tone to business would be allowed to lead to price reductions.
Wind forward now to September 2008: the value of chipboard is under heavy pressure despite the best efforts of producers to limit supply – and, therefore, to prevent price weakness – by taking significant periods of downtime.
According to a leading manufacturer, the emergence of cheaper offers in the market place would fail to solve the main problem facing the sector: an underlying lack of demand from a consumer base that is desperately short on confidence. Whereas order levels would normally improve once the summer holiday period had drawn to an end, business in the first three weeks of September “has been no different from July and August” and was currently more than 20% below expectations, he said. Other producers and distributors contacted this week were certainly not disputing this figure.
Construction and furniture demand
In terms of consumption patterns, the woes of the construction sector have translated into exceedingly poor demand for raw board and T&G. A producer said: “The big negative is coming from new build. The closer a chipboard product is to that sector, the worse it is doing.”
Meanwhile, large sections of the UK furniture industry are said to be “coming under threat”. Having noted that recent developments in the financial markets had rendered credit insurers “very risk averse”, a chipboard manufacturer said: “We are hearing that a lot of them have now started pulling their cover, for example, on furniture businesses.”
Until recently, demand for melamine-faced chipboard (MFC) had been holding up relatively well but, here too, there has been no appreciable pick-up in demand following the end of the summer holiday season. There is still some business to be had in the shopfitting sector but the office market appears to have been undermined by the impact of recent major failures in the financial sector. Overall, MFC orders are “nowhere near where they were this time last year”, according to one domestic producer.
Faced with such intractable demand-related problems, chipboard production curtailments have become the norm for many companies. For example, Kronospan’s factory at Chirk has been taking downtime during the course of every month, while Sonae UK implemented week-long periods of downtime in both August and September as part of its bid to “adjust capacity to fit with demand”. And the latter said it would continue to monitor the market and follow this same strategy as appropriate during the fourth quarter. A senior spokesperson said: “We won’t drop prices below what we can afford – we won’t be busy fools.”
Other producers – both in the UK and further afield – acknowledged this week that downtime had become a familiar resort. Indeed, one leading producer figure showed an admirable ability to turn a negative into a positive by claiming that his workforce had become practised in the art of quickly ramping up production following a downtime period. “We have developed a new skill set,” he said.
Elsewhere, a manufacturer spokesperson who has not been implementing downtime conceded: “We are keeping in line with demand but we are not reducing our stocks at the moment.” If this situation persisted, downtime would become a more likely option, he added.
Prices weaken
Despite the widespread downtime initiatives, prices have weakened to what one major producer described as “unacceptable levels” when weighed against a rising cost base. In particular, he noted that resin prices had followed up a sharp increase in the third quarter by jumping the equivalent of £4/m³ for the final quarter of this year.
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“The news of recent weeks has given the market another knock. More people now realise that they will have to make some serious decisions” |
Strong upward momentum in global urea prices has been sustained by yet another increase in the Chinese export duty, while formaldehyde prices are also giving cause for widespread concern.
Furthermore, fuel and energy prices are offering no comfort. Despite the drop in oil prices, the cost of diesel and petrol at the pumps has not fallen to anything approaching the same extent. Hauliers have been implementing fuel surcharges and, in many cases, removing significant capacity.
And while some chipboard producers have negotiated long-term energy supply contracts, others are facing what one described as “completely unreal” increases when their contracts are coming up for renewal. “Our energy costs have gone up 30% this month and are far above what they were at this time last year,” said a spokesperson for a domestic manufacturer. “It is starting to be a real problem and puts me in a position to think even more about taking downtime.”
Cost-cutting measures
All in all, the cost-cutting options open to chipboard producers have become severely limited. A leading domestic producer said that he had been forced to ask for a reduction in timber prices. And one of his UK counterparts said: “We are looking at wood as an opportunity to lower costs – but we have to be careful as this could drive suppliers away to other options such as biofuel.”
This renewed push for efficiencies has led at least one of the leading domestic chipboard producers to lay off workers. Another UK manufacturer said it had “tried everything” to avoid going down this same route but acknowledged that it might not be possible to resist the pressure to cut labour costs for too much longer.
For some UK producers, the weakness of sterling has offered a degree of respite in the form of increased opportunities to sell product abroad. One domestic producer said, for example, an upturn in his exports “outside of Europe” while another said overseas business levels had increased “a little bit”. One of their domestic counterparts said that they had received overseas enquiries for chipboard but that “a lot of hidden costs” made the exercise commercially unattractive in many instances.
Meanwhile, exchange rate considerations have deterred many Continental chipboard producers from selling into the UK, despite the fact that all are facing low levels of demand at home and in other export markets. “We have just won a major contract replacing some import business,” said one of the major UK producers. Some chipboard is still making the trip to the UK from producers on mainland Europe, prompting a domestic manufacturer to wonder: “I don’t know how they can [afford to] do it.”
Speculation
With very few experienced chipboard market players expecting conditions to improve markedly before the end of next summer at the earliest, talk of industry casualties and widespread closures has continued to swell. “The news of recent weeks has given the market another knock,” TTJ was told this week. “More people now realise that they will have to make some serious decisions.” Line and plant closures in the European chipboard sector were “inevitable”, he said.
In similar vein, a UK-based chipboard seller said: “In Europe, 25% of current presses must be under threat – especially those which are old or are not very efficient.” The levels of downtime now being taken were “insufficient” and would not serve to overturn the currently difficult market conditions, he added.
Looking to the longer term, however, industry experts offered a more upbeat assessment. Several said, for example, that the current low levels of housebuilding activity in the UK could not last forever. “We as a country are not building any homes and that is creating a pent-up demand that will ultimately be good for timber,” said one.
