Given the perilous state of the UK economy and the cost of living crisis, it is no surprise that chipboard, like other timber products, is suffering the consequences.
As Timber Development UK (TDUK) notes in its statistics covering January to May this year, the weakness of the construction industry and the poor performance of the UK economy during 2023 to date has reduced demand for many timber and panel products.
Add the quieter summer holidays into the mix and you have a market that one chipboard manufacturer summed up in six words: prices are falling; demand is subdued.
One contact estimated overall chipboard demand had declined by 20-25% over the past six months.
“If you try to win business, there is volume available; it’s not dead but you have to fight for it,” a contact told TTJ. “It’s OK but it could be livelier and the big question is whether it will pick up.”
The downward trend reflects the decline in housebuilding activity, which has been impacted by consumers struggling with rising mortgage interest rates and the higher cost of living, at the same time that incentives such as the Right to Buy scheme ended.
When TTJ spoke to contacts in February for the previous chipboard report (TTJ March/April, 2023), several were pleasantly surprised that business was better than anticipated. One contact believed that consumer confidence would return in the second and third quarters this year and that the fall in housing starts would be a shortlived dip. It is now apparent that view was too optimistic.
In August, Persimmon’s half-year results for the six months ending June 30 revealed the company built 4,249 homes, down 36% on the same period last year. The slump dented the company’s pre-tax profits by nearly 66%. Persimmon has cut nearly 300 jobs through a recruitment freeze.
In its half-year results to the end of June, Travis Perkins reported revenues down by 2.5%, driven primarily by the impact of significantly lower volumes in the new build housing and private domestic RMI markets. The company’s adjusted half-year operating profits were down 31% to £112m. In June, Travis Perkins issued a profits warning, expecting to deliver full-year adjusted operating profits of around £240m.
At the moment the chipboard sector is still benefiting from its products, whether it’s P5 flooring or MFC in kitchens and bathrooms, going into homes under construction but this will slow as house starts falter further.
“The full effect will be felt next year,” said a manufacturer, adding that the chipboard sector needed to secure business elsewhere, such as refurbishment, but that wouldn’t be sufficient to compensate for the loss of new build.
One merchant said RMI business was keeping the jobbing builder busy, perhaps reflecting a trend for people to improve their houses rather than move when interest rates are historically high and house prices falling.
Although the domestic chipboard manufacturers meet a large proportion of UK demand, European product does come across the Channel and volumes are down markedly. According to TDUK statistics, from January to May this year the UK’s chipboard imports were 10.2% lower than the same period in 2022, down from 286,000m3 to 257,000m3. During those months France nudged Germany out of position to become the UK’s leading supplier.
One merchant told TTJ that June and July were “extraordinary months” for his company as a whole, but over the full year he expects volumes to be lower than in 2022.
Consumer confidence and resilience have fallen as interest rates have risen but there was some good news in August as four of the UK’s biggest mortgage lenders cut rates on their fixed deals. Celebrations will be curbed, however, by the likelihood of the Bank of England raising its base rate again in September, and the National Institute of Economic and Social Research’s forecast that inflation would not reach the Bank’s 2% target until 2028.
The uncertainty of the UK’s economic recovery was highlighted the following week with the news that in July, inflation had fallen for the second consecutive month, and to a 15-month low of 6.9%. The Office for National Statistics (ONS) said the fall was largely driven by energy and food prices rising less quickly but the costs of hotels, air travel and rents were some of the main factors keeping inflation high.
The headlines seemed like good news but the ONS said core inflation – a measure which looks at price rises without factoring in volatile food and energy – remained unchanged, and the Institute of Fiscal Studies said the figures revealed the government’s target to halve the rate of inflation by the end of the year was in jeopardy.
While the economy is affecting chipboard demand, to what extent the summer holiday period is shaping the market will only be revealed in the autumn when order books traditionally get busier.
“We’re definitely back to seasons,” one contact told TTJ. “The Covid supply chain issues have gone so we’re back to normal, which means the summer season lasting from June to mid-August.”
In the past, on the Friday before the holiday season came to an end his dispatch department would order 10 extra lorry loads in the certainty they would be needed, but that will not be the case this year.
As to whether there will be any autumn improvement, the crystal ball is murky.
“Last year I didn’t have high expectations but we did have an autumn peak. This year things are a bit different and no-one really knows what will happen, but I don’t expect a big upswing,” the contact said.
A merchant said business quietened noticeably at the end of July. Although some of that was down to the summer holiday season, he didn’t expect activity to pick up.
“I think we’re going to see quite a significant decrease in demand as we go into Q4 and Q1, 2024,” he said.
TTJ was told that, perhaps surprisingly, some merchants were finding the London market quiet. This was attributed to the possibility that London homeowners have larger mortgages so have been hit harder by the “shockwave of interest rates”.
While the chipboard sector is not shying away from the prospect of difficult times ahead, for those who traded in the aftermath of the 2007-2008 global financial crisis the present scenario is much more positive.
“Our customers are still busy,” said a merchant. “It’s not going to fall off a cliff. The UK still has high employment and there’s no threat of mass redundancy.”
UK producers say that, apart from planned maintenance, chipboard production has continued as normal, and there are certainly no supply issues.
“We don’t call our monthly report an availability update now,” quipped one contact. “Those days are long gone. It’s quite the reverse, with suppliers desperately trying to see if you can take their product.”
The lower demand has inevitably put downward pressure on prices. A merchant contact was hopeful the market had reached its lowest point in August and prices would stabilise, but traders who want to secure volume could push prices down further.
In the past six months, the price of P2 has fallen 20-25%, while MFC prices are down 6-8%, TTJ was told. Another contact said 18mm and 22mm P5 had decreased around 15%. Flooring grade chipboard with a peel-off plastic film had kept more of its value, with prices falling by around 5%.
One contact told TTJ that price fights were particularly keen among distributors. While he did not condone the practice, he understood that motivation was to move volume.
The continuing consolidation in the merchant sector and the strengthening presence of private equity firms could also shape price trends.
“The merchant sector under private equity will be fairly aggressive on taking market share so that could drive the price down,” a merchant said.
He did not, however, oppose private equity investment and acknowledged the “excitement” it brought to the market.
“It allows investment. It gives you the ability to innovate, to develop the business and look strategically at new markets,” he said.
What path chipboard demand and prices take into the autumn and winter may well be decided largely by energy prices – those for consumers as well as manufacturers. Despite the financial pressures on households, many people, desperate for warm weather that has evaded them in the UK, have spent money on holidays abroad. Since they booked their holiday their mortgage rate may have risen again and now we are approaching winter without the £400 energy payment the government made to every household last winter. “It’s the people with mortgages who spend money on houses and interiors – and they’re the people who are our customers, the people who have been hit hardest,” a contact said.
For the moment, manufacturers’ costs are fairly stable but they can change with a shift in energy prices.
Last year Europe’s year-long demand for biomass, partly because of higher energy prices but also to reduce reliance on gas, put pressure on recycled timber supply and prices. Current energy prices mean biomass is not necessarily the cheapest fuel but this could change with winter demand for energy and developments in the war in Ukraine.
Although current trading conditions are difficult, several contacts took heart from timber’s low carbon credentials that leave it well-placed to take advantage of the inevitable recovery in housebuilding.
“The shining light is the sustainability and credibility of timber being used in construction,” said a merchant. “People need to amplify the message that is coming from TDUK. Chipboard is made from recycled timber so it has a good sustainability message.”
Another contact added that chipboard, in the form of P5 flooring or MFC, had the advantage of being used in homes of all types of construction and the growth in timber frame and prefabrication was an added bonus.
