For some people in the UK chipboard industry, the market has not shown any indications of strengthening from its weak position throughout the summer. There is still serious overcapacity in the market and the spectre of new production coming on stream that threatens to squeeze already small margins even further.

One contact said he had also noticed a decline in the activity of architectural firms in recent months – a sure sign, he believes, that the construction industry is heading for a bumpy ride.

‘There are signs of a slowdown,’ confirmed another contact. ‘It is not rife throughout the whole market place but there are sections of the market that are beginning to suffer.’

However, one UK-based manufacturer said that his business was significantly ahead of where it was just a few weeks ago: ‘We are pleased and relieved to be relatively busy and, in fact, we are under pressure for deliveries now. One never knows in advance whether the busy season is going to arrive or not – but it has.’

Despite a lot of negativity in the market, most people appear to be holding their nerve. Indeed there is ‘huge hope’, in the words of one contributor, that troubled German manufacturer Hornitex and its entire chipboard production capacity ‘will be taken completely out of the European market’ before too long, which may just provide the stimulus for more realistic prices to prevail in the UK.

Hornitex buyers

Some big players in the German chipboard industry are reportedly putting together a proposition to jointly take over the ailing giant and dismantle its chipboard operation. The idea is that the firms will ‘invest’ a potential total of about £100m in order to remove around 800,000m3 of chipboard production per year, thus relieving market pressure on their own chipboard operations.

This is a significant slice of the market, amounting to around 10% of the total annual German output of 8.6 million m³, though it would make less of a dent in the overall European output of about 36 million m³.

&#8220I don’t think, in terms of the economy, events like September 11 are going to have that much of an effect. It has actually brought the world together. It is far more likely that the general slowdown in the world economy will have a bigger negative effect on confidence’”

Hornitex’s MDF side is a more attractive proposition and may be bought as a going concern, partly because, unlike chipboard, this product’s markets are not yet thought to have reached saturation point.

Realistically, there is little or no prospect of any potential buyer making a profit out of Hornitex’s particleboard side, primarily because it is equipped with old machinery – 25 years old in some cases. None of today’s chipboard manufacturers could use the plant profitably, neither could they afford the huge sums required to bring it up to the high standard of efficiency necessary for modern production – which gives a clue as to one possible reason for the difficulties now facing Hornitex. ‘The equipment should have been replaced 10 years ago,’ commented one observer. ‘No-one wants to buy that sort of technology anymore.’

Breathing space

In UK market terms, such a move by the Germans could provide a welcome stabilising effect, it is believed. The reduction in output would also make it less likely that European firms will dump production in the UK, giving domestic companies a bit more breathing space.

Hidden among Hornitex’s particleboard output figures are substantial volumes of melamine-faced chipboard and associated downstream products, much of it still awaiting a home. The gradual elimination of this volume would provide relief in one of the most hard-fought of all chipboard sectors.

UK chipboard prices are relatively stable on most products at the moment, running at similar levels to those prevailing throughout the summer. However, they have been driven down slightly because of ‘opportunistic’ pricing policies and because some manufacturers did not observe the traditional two-week summer shutdown, according to one contact.

At least one manufacturer has confirmed that his factory will close over Christmas ‘come what may’.

‘We hope that others will follow suit to avoid the seasonal glut and seasonal price reduction,’ he said.

&#8220Currencies have stayed pretty stable. It helps us as importers to the UK but, of course, it doesn’t help UK exporters”

The real problem here is that chipboard buyers have become used to paying rock-bottom prices for product and are also very adept at playing-off manufacturers against each other, making the situation very difficult to retrieve.

Rallying calls by one or two high-profile manufacturers for the UK chipboard industry to unite in trying to force prices upwards have been dismissed as ‘weasel words’ by a contact. ‘What they really mean is they want everyone else to raise their prices, giving them the freedom to run around undercutting and keep their order books full,’ he claimed. ‘But the industry really does need some sort of permanent price recovery.’

Another contributor said he was disappointed to find that some manufacturers are still dropping prices, despite the fact that lead times are going out in some cases – a situation which ‘totally and absolutely defies logic’, he said.

For much of the last quarter the exchange rate of the pound against key currencies has remained more or less constant, creating an unusually stable financial environment in which chipboard importing firms in particular, and domestic manufacturers to a lesser extent, have been able to consolidate. The Deutschmark, for example, has hovered between 2.15-2.20 against the pound for the past two months, and hasn’t dropped below 2.11 in the last three.

‘Currencies have stayed pretty stable,’ confirmed one agent for an overseas producer. ‘It helps us as importers to the UK but, of course, it doesn’t help UK exporters.’

Several contacts voiced understandable concerns over the fragile state of commercial and consumer confidence. ‘There are two things happening at the moment, you’ve got this terrorist impact and you’ve got an already-declared economic slowdown,’ said one. ‘But I don’t think, in terms of the economy, events like September 11 are going to have that much of an effect. It has actually brought the world together. It is far more likely that the general slowdown in the world economy will have a bigger negative effect on confidence.’

One contributor believes that the chipboard market of the past 12 months, characterised by low prices and minute margins, has become ‘normality’ and that people must simply come to terms with it, rather than wait for better days. Prices, he said, have been hopelessly pinned down by overcapacity.

He envisages three possible scenarios for the market over coming months. ‘In the best case, prices will remain stable; in the average case, prices and volume will both drop and, in the worst case, the bottom drops out of the market,’ he said. ‘Each of those scenarios is as likely as the others.’

The only thing that will bring about an improvement in chipboard prices is a reduction in capacity, he added. ‘Unless we get a rise in the cost of living, which everybody is fighting against, I don’t see how else we in the timber sector are going to be able to get more money for our products.’