In April, when Irish state forester Coillte, which produces MEDITE MDF and SMARTPLY OSB, announced its 2022 financial results, chief executive Imelda Hurley reflected on a strong performance in 2022 but warned that 2023 would be more challenging.
“When I look to 2023 and our experience so far, there is no doubt that the business is seeing the effects of inflation and rising interest rates,” she said. “These headwinds indicate challenging trading conditions and weaker consumer demand in 2023.”
And while the impacts of inflation and rising interest rates – and hence the increasing cost of living – are on everybody’s minds, UK demand for MDF is holding its head above water for the moment.
TTJ’s contacts described demand for raw MDF across a spectrum from “alright” to “OK but not brilliant”, to “very, very good”.
But while perceptions of demand may vary to some degree, there is agreement that industrial MDF users are doing well but business has quietened in the traditional distribution merchanting sector.
“It’s a mixed picture from my customers – some are busy but others, mainly distribution and DIY, are quieter, but that might be a reflection of the good weather and people spending time outside,” one contact said.
Another contact said the top end of the kitchens, bathrooms and furniture market is relatively unscathed but, as one might expect, it is the middle to lower end of the market feeling the economic pinch.
The dip in demand may also in part be a consequence of the multiple bank holidays the UK had in May when not only did business stop on the designated holidays but many people took holiday around those days.
“April was very busy, even with Easter, and demand was alright until the end of the month but the bank holiday weekends dampened everything,” one manufacturer told TTJ.
Another contact agreed that softening in demand in May was entirely a result of the concentration of bank holidays. ”It’s not been ideal at all,” he said.
In late June, however, things started to pick up again – with one manufacturer describing the change as “transformational” – but it was too early to predict whether it would be a sustained improvement.
The faced MDF market is “pretty busy” and demand for MDF mouldings is holding steady. In fact, anything to do with the interior fit-out on new housebuilding is performing satisfactorily as houses that were started last year are now nearing completion. Whether this business might slow in the second half of the year as houses are completed but the lower number of house starts filters through, is not clear.
MDF prices have come down this year – around 5% in April and there will be a similar reduction in Q3. One manufacturer attributed the softer prices to the softer demand and a reduction in energy and chemical prices.
Another contact, however, believed the price was influenced by low demand in Europe.
“UK volumes will be up 8-10% but at the same time prices will have softened around 10%,” he said, adding that the major driver was shrinking demand from Germany as the country, which was once Europe’s economic powerhouse fell into recession.
European traders who normally supplied to Germany have high levels of volume and are “struggling to give it away”. They are trying to place product elsewhere, and currently the two strongest markets are France and the UK.
“The price in the UK is purely down to European producers either offering product into the market, or the UK importer driving down the price. None of the UK producers need to be in this position if you look at the volumes,” the contact said. “Germany is creating the rhythm, but Spanish, Belgian and Portuguese producers all have high levels of volume.”
He added he was “a bit frustrated” that Europe’s difficult situation and competitive behaviours were “contaminating” business in the UK but he accepted that was just the rules of business.
One contact believed the UK’s imports of European MDF had risen substantially in Q1. Timber Development UK’s latest statistics, however, show a less dramatic increase but do illustrate a rising trend. In Q1 this year imports were up 0.3% from 195,000m3 last year to 196,000m3.
The European mills’ summer shutdowns – and this year they may extend those shutdowns because of Germany’s stuttering demand and the market imbalance – will reduce production but, because of their high levels of stock, this may not have any material effect on the market until Q4.
In the meantime, the MDF sector is likely to watch the price of its product decline. One contact said there was already evidence that MDF was being sold below cost in Europe, “so now it’s at variable pricing”.
“Ultimately that will contaminate the UK so there will be further price erosion. The price at the end of the year will be lower than the price on July 1. That’s a function of the impacts in Europe and how far it travels,” he said.
He estimated that over the next few months UK prices would be down 10-15% on the same time last year.
“Unless there’s a significant contraction in UK demand or we are flooded with even more imports, then I think there’s enough volume to go around but it’s a matter of what price you need.
“Ordinarily, market forces would say the price is falling because you’re trying to get volume that isn’t there. The current reality is the volume is there but it’s the behaviour of customers or competitors.
“It’s just market forces: if someone gets 5% off because they’re a good negotiator, that eventually debases the market by 5% or more.”
One contact also pointed to the disruptive effect of Chinese MDF coming into the UK. “They’re not big volumes, perhaps just one ship, but they make a lot of noise and flog the product cheaply. I don’t react – I ignore it and wait for the product to flush through,” he said.
At the same time that MDF prices are softening, the cost of residues is rising as sawmills reduce production in the face of weaker demand for softwood. With residue costs and MDF prices pulling in opposite directions, manufacturers’ margins are under pressure.
“Sawmillers are not having a fantastic time. The price of softwood has crashed and, again, the European dynamics are having a big impact, with European [softwood] product coming into the UK,” TTJ was told.
“People are talking about some sawmill downtime in the second half of the year. If that happens then wood residues will really be impacted. There’s a jeopardy that the panel sectors are performing well and perhaps outperforming traditional softwood.”
The summer silly season of trading is a thing of the past in the UK and now trading is pretty much sustained at normal levels – unlike in Europe where business may drop off 25-30% over the summer. But even so, it could be late summer/early autumn before UK traders have a clearer picture of the market. The shadow of Covid lockdowns and the high cost of living are likely to influence consumer spending choices, but it is not clear to what degree.
“People are spending a lot of money on holidays but is that in preference to spending on furniture? Or is it because they missed so many holidays during Covid that they’re taking them now and they’ll take fewer in future?” said one contact.
Many products MDF goes into – furniture, kitchens, bathrooms – are discretionary spends and the news that inflation remained stubbornly high at 8.7% in May – higher than expected for the fourth consecutive month – could create further consumer caution.
Many households, especially those with mortgages, will be feeling the impact of high inflation. On June 22 the Bank of England raised its interest rate by 0.5% to 5% – the 13th consecutive increase since December 2021. The previous day, the Institute for Fiscal Studies had warned that rising interest rates could create a 20% drop in disposable income for 1.4 million mortgage holders.
