Distributors and end users were made directly aware of the impact of rising costs on MDF manufacturers in a dramatic pre- and post-Christmas period.
Energy prices had been a focus of concern for the trio of leading domestic producers for some time but the situation came to a head during November when gas prices increased from between 30-40p a therm to, typically, 170p. All three of the leading domestic MDF manufacturers duly went to the market and asked for a further 5% for their product.
In some instances, this additional payment was deliberately couched as a “surcharge” rather than a price increase in order to make absolutely clear to distributors and end users that “devastatingly and cripplingly high energy costs” were the direct cause. “We made it a surcharge to bring it to people’s consciousness – to get people’s attention,” said one manufacturer. Without these increases, “the whole industry would have stopped making MDF”.
But more was to come. Since the turn of the year, manufacturers have implemented further MDF price hikes of around 5% in most instances, although one of the producers said his company had limited the rise to 3% on faced MDF products while adding 5% to the price of all raw MDF.
A senior spokesperson for one of the domestic MDF manufacturers maintained that recent gas price increases had been costing his organisation an additional £1.2m each month. “You cannot sustain that,” he insisted. “The Wood Panel Industries Federation is lobbying the government not only on the scale of recent gas price movements but also on their potential to affect output” (TTJ December 10/17, 2005).
This latter point was underlined by one of the manufacturers: if gas prices reach a certain level and increases cannot be passed on to customers, then this is bound to influence the decisions about production. Another of the leading three manufacturers confirmed that MDF output had been stopped for three days over the Christmas period, purely as a response to the leap in gas prices.
The domestic manufacturers are not ruling out the possibility of further price increases in the short to medium term. They are aware of the argument that energy prices tend to fall during the warmer months but, as one senior spokesperson put it, “we don’t think they will return to previous levels”. Another senior manufacturer observed: “I don’t think it’s over. We expect more price increases based on what we are seeing and hearing. The value of the product has to rise.”
Other costs
Furthermore, manufacturers could well be forced to respond to other increases across what is described as “an extremely volatile” cost base. For example, the government’s renewables policy is widely expected to push up producers’ timber costs this year. “If we get increases, we’re going to have to pass them on,” said one manufacturer. “The industry is losing money.”
That said, the producer sector is also conscious of the need to adopt a measured approach to increasing prices which does not “force out our customers”. One manufacturer pointed in particular to the plight of the domestic furniture trade which is coming under increasing pressure from imports of components and finished goods, notably from China.
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“If we get increases, we’re going to have to pass them on. The industry is losing money” |
In general, distributors have responded positively to the recent surcharge and price increase since these have returned some value to a product that is widely acknowledged as having been under-priced for some time. However, it has also been suggested that the acid test will come towards the end of January when all of the increases have filtered down to end users and when new year demand patterns have become more settled. Not for the first time, domestic MDF manufacturers are being urged to hold the line on prices. “We are quite happy with the increases so long as they are sustainable,” was typical of the views put forward this week. “But as soon as someone gets cold feet, there could be a problem.”
While some contacts maintained that the extended holidays taken by many people had led to a quiet start to the new year, most contacts said demand has been relatively healthy in the fourth quarter of last year and the early part of 2006 – a phenomenon attributed by some to better-than-expected consumer spending and to the uncorking of pent-up demand. Most sources said order levels in early January were ahead of those at the start of 2004.
In its 2004/05 annual report, the European Panel Federation (EPF) predicted that UK consumption of MDF would advance from 1.2 million m3 in 2004 to nearer 1.25 million m3 last year. Some experts believe the forecast may prove to have been reasonably accurate and EPF members attending the body’s General Assembly last year were generally upbeat about business prospects. Latest figures from the organisation indicate that MDF production made “an exceptionally vigorous start” to 2005 when increasing by more than 6%. During the second quarter, however, production growth plunged below zero for the first time in five years before mounting a recovery in the third quarter with growth of more than 4%. Overall, in the first nine months of last year, MDF production in Europe was almost 3% higher than in the corresponding period of 2004 thanks to a jump of more than 5% in exports outside of Europe. Demand in Europe itself fell by almost 5%.
Domestic MDF producers appear relatively comfortable with current stock levels and are pointing to a much closer balance between MDF supply and demand. They also emphasise that no major new MDF capacity is set to come on stream in the near future whereas the number of applications for the material is continuing to grow. In addition, currency considerations and the comparatively low level of UK prices have combined to severely restrict the volume of imported board entering the UK.
As well as these dramatic market developments, the latter part of 2004 also threw up some major news in the MDF sector. In late November, Pfleiderer AG formally acquired the engineered wood activities of the Kunz Group in Germany and North America. The deal, which was concluded for around €192m, included the Classen Group’s minority holding in the Kunz Group’s MDF plant at Baruth. The plant produces around 450,000m3 of MDF/HDF per year and has been described by Pfleiderer as a “highly-efficient” operation.
Weyerhaeuser sale
And shortly afterwards, it was confirmed that Weyerhaeuser was putting its composite panels business up for sale for reasons of “strategic fit” (TTJ December 10/17, 2005). The sale package comprises seven production units capable of generating an annual total of around 2.5 million m3 of MDF and chipboard, including the Medite MDF facility at Clonmel in the Republic of Ireland. A senior spokesperson in the UK said that it was “business as usual” for the Irish facility, and that sales and promotional activities would be unaffected by the announcement.
Asked to identify the key factors likely to characterise the MDF market in 2006, the majority of sector experts predicted that the near and medium term would bring further upward price pressure on the back of rising costs and, hopefully, a more favourable supply/demand equation. Domestic manufacturers are unequivocal on this issue: costs are likely to continue to rise and so prices must also show progression.
At the same time, many expressed concern over the growing impact of the Far East: in the short term, the region’s cheaper goods and components are posing a major threat to UK end users, notably in the furniture sector; longer term, some fear that the region will build up its own MDF production capacity and ultimately become a major force in the international market.
