Summary
• Recent downtime in the UK has reduced manufacturers’ stocks.
• Price rises are generally on hold but higher costs will keep them under review.
• Oak veneer is in short supply because of demand from China.
• Some say the UK market is being affected by MDF imports from Europe.

Our previous MDF report debated whether the UK market was experiencing a temporary blip or whether a more prolonged downturn was in prospect. Two months on, the medium-term direction of the market remains a point of conjecture – although many experts believe demand has been stronger in the early part of the year than the wider economic news tended to indicate.

Recent periods of downtime have enabled some producers to enter 2008 with MDF stocks lower than they might otherwise have been. For example, Kronospan closed one of its MDF lines at Chirk for six days prior to the festive season and the other for five days after Christmas. According to a spokesperson, the company remained “well-stocked” but not to a problematic level, while orders had picked up since early January so they were now “about normal” for the time of year.

Downtime was shorter elsewhere in the domestic market. For instance, Coillte’s Clonmel plant in Ireland continued to produce throughout December with the exception of Christmas day and, according to a spokesperson, has duly reduced its lead time to three or four days. Many customers delayed their return from the festive break but, by the middle of January, the company’s order files had become “surprisingly strong” in light of the wider economic news. This view was shared elsewhere in the MDF production sector, with one contact claiming “good demand across the range of products”, notably for mouldings.

Optimistic outlook

One of the trio of leading UK producers confirmed that MDF sales volumes in 2006 and 2007 had been separated by less than one percentage point. However, with price increases keeping just ahead of rising costs, 2007 had proved to be “a financially better year”. And a spokesperson remained optimistic about the prospects for 2008: “The trend in the newspapers is to talk everything down but it’s not as bad as they are making out – and the evidence is in our order files.”

While acknowledging the problems in the US housing market and the relative flatness of some of the leading European economies, his company’s sales tended to indicate that the UK housing sector was not as weak as press reports were implying. Nevertheless, he added, negative – and in some instances “highly irresponsible” – newspaper reporting was already affecting buying decisions.

Although the early months of 2008 may prove to be more difficult for the MDF manufacturing sector, another leading producer also expressed confidence in longer-term prospects. “I am quite convinced that there is a shortage of houses in the UK and that this will have to be satisfied,” he said. “The underlying demand is still there and it’s not going away.” MDF consumption was still enjoying long-term growth – thanks in part to innovation and new applications, he added.

A distributor hailed 2007 as a positive year because it had provided an opportunity to re-inject much-needed value into the MDF market, while a company specialising in veneered MDF also described it as “a good year in which volumes were higher than in 2006 and in which we got three price increases”. The company said 2008 probably would not be as good as 2007, “but so far, so good”.

But such optimism seems unlikely to be translated into higher producer prices in the immediate future. One domestic manufacturer confirmed that his company had proceeded with a scheduled MR MDF increase at the start of the year but that other increases were “on hold”. There were similar responses from other domestic manufacturers: one said it was not looking to implement a price increase “right now or in the very near short term” but that rising costs would ensure prices remained under review; and the other argued that opportunities to implement a price increase would depend on cost base developments.

Cost pressures

If thoughts of early-year increases have been consigned to the back burner, cost pressures are forcing producers to keep the need for price progression on the agenda during discussions with their consumers. One manufacturer told TTJ: “We are certainly talking to our customers about maintaining MDF product values in relation to rising costs.” Nevertheless, he added, it was “too early to call” when this might be reflected in higher prices.

Further cost pressure has come in the form of significant resin hikes for the first quarter of 2008 which, according to one expert, equates to more than £5/m³ on MDF. Indeed, one of the home producers estimated that, between the third quarter of 2007 and the first quarter of this year, his company’s combined energy, timber, methanol and urea costs had leapt more than £2m. “This is not just a UK problem – it’s a Europe-wide problem,” he said.

And producers of veneered MDF can add another pressure to this list. TTJ was told this week: “All oak veneers seem to be heading to China, so they are proving very hard to get.”

Returning to the issue of price, customers of one of the home producers have reportedly been claiming that MDF is available at cheaper prices from elsewhere on the domestic market and have been using this as a negotiating tool. “But we think they are not comparing like for like,” said a spokesperson, “and so we have resisted the temptation to reduce our prices.”

It was also suggested by others that the UK market was being affected by comparatively low-priced board imported from western Europe. Several contacts said that imports were continuing to enter the UK – some at “aggressive” prices – because of quiet market conditions in the Continental producers’ domestic and key export markets. However, the consensus was that this flow “had not led to any great relaxation on price” in the UK.

Exchange rates

Meanwhile, a domestic producer argued that imports from the euro zone were now being compromised by exchange rate developments: in recent times, the value of the pound has dropped more than 10% in relation to the euro. Indeed, several contacts suggested that this flow was effectively at an end and that the imported material within the UK market place was the result of deals concluded last year. It was also reported that small volumes of MDF were continuing to arrive from China, although several contacts expressed misgivings over the quality of the product.

Contacts outside the domestic MDF production sector offered mixed opinions on the health of UK demand. Several reported that the phones were quieter than normal for the time of year while one suggested that customers were now opting to buy on a hand-to-mouth basis. With material available ex stock, there was “no benefit to ordering on a forward basis for a lot of people”, it was suggested.

Other sources were relatively pleased with order levels so far. Many described demand as “reasonably good”, with decent order files for the shopfitting, kitchen fittings and joinery sectors in particular. Although merchant demand for the construction sector was less buoyant for the moment, the overall picture was “possibly better than many people had expected”.

One contact continued: “I’m tired of this industry talking itself down. There is a danger that all this ‘credit crunch’ and ‘economic doom and gloom’ talk will become a self-fulfilling prophecy – and it’s just not necessary. I suspect 2008 will be a decent year but not necessarily as strong as 2007 which was driven by material shortages and higher prices.”