Summary
• Many merchants and end users have restocked, boosting demand in the short term.
• The demise of MFI was another blow for raw board sales.
• Sales of industrial flooring and MFC have been the most durable.
• Sterling’s loss of value has improved UK export opportunities.
• A lack of available credit is a major obstacle.

Early January business levels exceeded the generally low expectations of some of the leading domestic chipboard producers – but consumption was still well short of that recorded in the early weeks of 2008. Furthermore, those same manufacturers fear this may have been no more than a post-Christmas restocking blip that will soon give way to more difficult trading conditions.

The first full week of trading in 2009 was “a bit better than I thought it would be”, said a senior domestic producer. “There has been a bit of life in the market, which is encouraging.” One of his UK counterparts was also conservatively upbeat, adding that December had been “relatively good” in volume sales terms and that 2009 had enjoyed a “relatively strong start”.

However, the latter contact quickly acknowledged the danger of raising “false hope”. Many chipboard customers opted to extend their holiday breaks around Christmas and the New Year, while a large proportion of merchants had chosen to de-stock in the weeks running up to the end of the year, he said. As a result, recent trading patterns were probably a reflection of end user and merchant restocking in line with immediate – and in many cases, limited – requirements. “We should temper any enthusiasm with realism,” he said. “Late January and early February will be more of a gauge.”

Indeed, a number of producers contacted this week expressed particular concern about sales prospects for the latter half of the first quarter when any early-year restocking boost will have run its course.

Lengthened shutdowns

In the light of truncated consumption, chipboard producers across Europe chose to lengthen plant shutdown periods during December and early January. According to a UK manufacturer, his company took out two weeks of production but continued to dispatch chipboard right up until the Friday before Christmas. “This allowed us to hit our stock target for the end of the year,” he said. “We are now at our optimum stock level and will manage our production in 2009 to keep them there. We are not prepared to produce anything that we don’t have orders for.” This was a view shared by other manufacturers.

Another domestic producer which traditionally produces throughout the Christmas holiday period opted to close the plant for two-and-a-half weeks this time round. According to a senior spokesperson, the stock situation for his company has improved significantly while many customers’ destocking programmes should now have reached their end. “Perhaps now we will see the real business levels,” he said.

Sonae UK was willing to be more specific about its approach to the coming year. A senior spokesperson said that the company is prepared to take downtime on a monthly basis at its Knowsley plant in order to keep stock levels within acceptable limits. The decision on whether to stop the plant would be taken from month to month and would hinge on the order outlook at that time. However, the company has already planned closures during two traditional holiday periods – Easter and for two weeks in August.

As TTJ was going to press, Sonae’s sister company, Spanboard, confirmed it plans to close two raw chipboard production lines in Northern Ireland. All its chipboard will now be manufactured at Knowsley.

Price pressure

As mentioned, order levels may have shown greater vigour in recent weeks but, in comparison to last year, sales volumes are widely believed to be 25-30% lower than at the same stage in 2008. At the same time, chipboard prices have come under pressure in the UK, although there was little agreement on the scale of the decline.

News of MFI entering administration towards the end of last year landed another blow on raw board sales. Meanwhile, orders for T&G are described as “very depressed” when compared with normal patterns, largely because of the slowdown in the UK housebuilding sector. There is a view that some housebuilders may be coming close to exhausting their stock of homes and therefore may look to resume construction activ-ity. “I believe we’re going to see a little bit of an upturn in the building sector,” said a manufacturer. “We feel it’s at the bottom.”

Sales of industrial flooring and melamine-faced chipboard (MFC) appear to have proved more durable, according to several domestic producers. One manufacturer said opportunities for UK manufacturers to sell MFC into their home market have been enhanced by the weakness of the pound in relation to the euro. “Imports are really unsustainable and so that means extra business for domestic producers,” he said. “MFC is the biggest growth area because it took up a big part of the imports.”

Sonae UK is particularly upbeat in relation to MFC sales prospects and still believes 2009 “could be a record year” for the company in this product segment.

Export opportunities

While the pound’s weakness has dented chipboard imports, its loss of value in relation to the euro and the US dollar has strengthened UK export opportunities. A domestic producer pointed to wider overseas interest in UK chipboard generally as a result of currency considerations, including shipments completed to some relatively long-haul destinations. The volumes involved have not been large but “at least it moves a bit of capacity off the home market”, he said.

However, another domestic producer figure said that euro-zone openings were severely limited by Continental producers’ stout defence against imports. Additional transport costs were mentioned elsewhere as a reason why overseas shipments were unlikely to bring much solace to domestic producers.

Outside of producer circles there is widespread support for regular plant closures as a means of controlling chipboard output in line with what seems likely to be a prolonged dip in consumption. “We need to see some serious downtime,” said a contact. “Those manufacturers running older machinery in particular may be forced to close them for good.” Several producers agree that “rationalisation” is almost inevitable in the European chipboard sector.

There is also a growing aversion to “producing for the sake of it”, especially given that many manufacturers’ production costs are continuing to firm. For example, one domestic manufacturer said that “last weekend’s gas price was the highest we have seen in the last few months”. And while their timber costs have proved to be relatively stable, costs of recycled timber have become elevated on the back of increased competition for supplies and reduced availability.

Furthermore, the highly-publicised drop in the cost of oil is said to have had a far more limited impact on UK chipboard manufacturers’ petrochemical costs than the market place might assume, not least because these substances are sold mainly in US dollars and euros. Resin prices have fallen from their late-2008 peaks “but the relief has been diluted by the currency”, TTJ was told.

“Our costs are continuing to escalate, and at some point we need to take the difficult decision to pass these on to the market place,” said a UK manufacturer. However, some customers “have been trying to force through 10% price decreases”, he added.

Lack of credit

A lack of available credit is seen as a major obstacle to moving the UK chipboard market forward, with several producer contacts this week accusing the credit insurance business of being “excessively risk averse”. One manufacturer commented: “Our main worry is the withdrawal of credit cover on our customers. They are putting some good companies under severe pressure. It also means we are being forced into taking some educated risks.”

Another producer described the attitude of some credit insurers as “a knee-jerk reaction” that had prompted “a general nervousness” in the trade.