Summary
• The MDF market has picked up in the fourth quarter.
• UK manufacturers are likely to raise prices by 5% early next year.
• Sales of specialist products are reasonably buoyant.
• There is little imported MDF coming into the UK.

Supply of that fragile commodity known as market confidence has been growing over the course of the fourth quarter, according to feedback from MDF experts. Capacity utilisation rates have continued to improve as sales volumes have moved increasingly into line with what are yearningly described as “normal” levels.

A senior representative of one of the three UK MDF producers spoke of a relatively active fourth quarter characterised by “reasonable order file volumes”. And he hailed as “particularly encouraging” an upturn in demand from the shopfitting sector which would appear to indicate a greater degree of optimism in retailer circles. In terms of overall demand for MDF, he concluded: “We seem to have turned a corner – but it’s hard to say whether it’s the corner.”

Several contacts said this week that demand for MDF had tailed off earlier than normal in December as buyers responded to ebbing order levels and looked to minimise their stocks ahead of the Christmas break. But a leading distributor said at the time of writing that the “December factor” had yet to impact on sales volumes. “In the first few days of the month, we are still running at the November rate,” he said. Fourth-quarter sales in general had been “quite steady”, he added.

Stock replenishment

This upturn in orders during the final quarter of the year has been attributed by some experts to importers and distributors having worked through stocks which now require replenishment. And one warned that the majority of buyers in the UK remain “ultra cautious”, preferring to order “little and often” and to take part loads in preference to full ones.

It is against this backdrop that some of the MDF manufacturers who dominate the UK market place have already committed to a price increase of around 5% from the start of next year. One confirmed that, from his own company’s perspective, the hike would be restricted mainly to standard board and MR.

In happier economic times, the announcement of a further price increase would have been read simply as a sign of mounting producer confidence in the market but, in the current economic climate, it is more a testament to the struggle among manufacturers to offset rising cost pressures. “This increase doesn’t solve the financially unsustainable pricing,” said one manufacturer. Having said that further increases will be required during the course of 2010, he added: “There is no future in staying where we are as far as prices are concerned.”

One of his rivals complained that “my costs are starting to run away”, noting in particular the rising value of timber and chemicals.

Necessary price increases

A leading distributor acknowledged that this latest price announcement is “probably down to necessity” for the mills. At the same time, he emphasised the difficulties for distributors in passing on such increases given the financial struggles afflicting many end users and the reluctance of many of them to accept any sort of hike under these circumstances. In this latter regard, the continuing existence of low offers in the MDF market place is said to have been detrimental to achieving price progress. “It took us until early November to get the last price increase through,” the distributor said. “And products are still being sold at cost price in some instances.”

The distributor was not alone in this view: responding to confirmation of January increases, a UK representative of a Continental MDF producer expressed the hope that the higher prices “will be enforced this time” given the availability of low-priced “deals” from some quarters in the UK long after the effective dates for the most recent round of price hikes.

And a UK-based veneered MDF specialist also noted: “We have heard some ridiculously low prices from competitors.” At the same time, he highlighted quality concerns surrounding some of the veneered material coming into the UK, contending that this “could push some consumers in the direction of melamine”.

While the January price increase envisaged for the UK is around 5%, some mills in Continental Europe are planning a “double-digit” percentage surge from the start of next year; and according to the UK representative of one of them, this hike is likely to be the first of several introduced during 2010.

Having pointed out that price increases are being driven by costs at present, he welcomed the growing realisation among customers that “we can’t keep making board we can’t move or keep selling it at a price that gives us a loss”. And he added: “If any mills are cash-positive this year, they’ll have done really well.”

But while outright profitability may remain elusive for MDF producers, they can at least point with satisfaction to an upturn in sales volumes. “The second half of 2009 is well outperforming the second half of 2008,” said one. And he added that he was “quite optimistic” for the early part of 2010 given the bookings already made.

The same contact said that the improvement in sales has been more pronounced in higher value-added products. Another contact agreed with these sentiments, confirming that sales of some of the specialist forms of MDF are “quite buoyant” at present.

The overall improvement in the demand picture has convinced at least one domestic MDF manufacturer that, having spent several months gradually restoring capacity utilisation rates to almost normal levels, he will continue production throughout the festive season. “We have no downtime planned,” said a senior spokesperson. “We will run throughout Christmas because we need to build stocks.” And he expressed the hope that the holiday break will not disturb the momentum and the more positive sentiment established of late.

Another of the leading producers confirmed that output was “not totally flat out” before adding that “it’s not far away”. The company is proposing to take a short period of downtime during the Christmas break in order to keep stocks under control. At present, he added, availability “is still prompt”.

Lead times have “crept out a bit” on thinner specifications, according to one leading distributor. He went on to describe a lead time of two weeks as “ideal” because “this is quick enough to keep the confidence to turn the stock over” and because “it helps keep stupid prices out of the market” since a person giving consideration to offering a deal “will think twice if he has got to wait two weeks for the material”.

Domestic producers are continuing to benefit from an almost complete absence of competition from foreign-made MDF. A spokesperson for a major importer said that, in many instances, freight costs and currency considerations are effectively ruling out shipments from both outside and inside Continental Europe.

Overseas producers

Furthermore, some overseas producers find themselves in market regions already emerging from recession and so are more concerned with taking advantage of rising local demand for their products. For the most part, therefore, UK imports have been restricted to “specialist boards and specialist thicknesses only”, said a leading distributor.

As well as dampening imports, the weakness of the pound has continued to open up opportunities for sterling-based producers to export MDF, with southern Europe identified as one of the regions to take delivery of UK-made product.

So what of the future? Even before it began, there was an almost universal acceptance that 2009 would be a year to be endured rather than enjoyed. And while the business outlook seems to have brightened as the year has progressed, most experts acknowledge that the MDF market recovery is likely to be steady at best in 2010. “I expect a lot more emphasis next year on not selling at a loss because it’s ultimately unsustainable,” said one expert. “Some people may have done it for a number of months to try to retain market share for when the market returns. But because the bounce-back hasn’t been as quick as they would have hoped, they will now have to reconsider this tactic.”