Summary
• Buyers are reluctant to over-commit and are restricting purchases to small parcels.
• Producer price weakness has focused on standard board.
• Sales of melamine-faced MDF are holding up reasonably well.
• Demand for FSC accreditation within the veneered MDF sector has risen.
• Imports of MDF from beyond Europe are being prevented by high freight costs.

After an absence of several years during which the domestic trade worked hard to build much-needed value into the MDF chain, there has been a return to the summer “silly season”, according to senior industry contacts. In the face of dull demand, competition to sell standard MDF has been fierce and producers and distributors have both reduced prices.

In effect, manufacturers and distributors have been confronted by a double whammy, with a general lack of business confidence combining with the traditional summer lull in industrial activity. It is alleged that distributors have been “cutting prices to the bone” in a bid to protect their market shares, while producer prices have also weakened – albeit to a lesser extent – in certain MDF product areas.

“It is as difficult now as it has been all year,” said one of the trio of leading domestic producers. “The holidays have come on top of low demand and it’s quite a challenge to achieve the volumes each month.” Buyers are undoubtedly reluctant to over-commit, with orders generally limited to small parcels that are destined to satisfy immediate needs. “It’s a brave person who commits to volume in the current environment,” said one source.

A leading distributor said that orders were being placed for MDF but that price was the over-arching consideration for most customers. “You have to be right on with your prices – even 10p/m3 over the top is too much,” he said.

Raw board prices

The necessity of dropping raw board prices in order to remain competitive has been felt even by those UK manufacturers who have chosen to take regular periods of downtime in a bid to underpin the value of the product. MDF production at the Kronospan plant in Chirk was halted for around one week in both June and July, and a similar period of downtime has been scheduled for August. A senior spokesperson for the facility said that, as a result of these measures, the factory was no longer building stocks of standard board.

At the time of our previous MDF report, management at the Medite production facility in the Republic of Ireland said that downtime had become a fact of life throughout the sector. Earlier this month, it was confirmed that MDF production at the Clonmel plant would be halted for an unspecified number of days during August as part of a programme of downtime that was described by Medite as “ongoing”.

It should be emphasised that producer price weakness has focused principally on standard board, with construction activity and shopfitting among those sectors reflecting consumer nervousness via reduced order levels. The latest survey from the Chartered Institute of Purchasing and Supply (CIPS) reveals that, from a no-change level of 50, the UK housebuilding index slumped to 40.3 in April and then to 25.6 in June before reaching a record low of 18.7 in July. Thus, housebuilding emerges as the worst-performing segment of the construction industry on the back of tight lending conditions and low buyer interest.

However, stagnation in the housing market seems to have boosted home improvement sales as people upgrade their existing properties rather than look to move. In this context, sales of melamine-faced MDF are said to be holding up reasonably well, while one producer of laminate flooring said his sales were running ahead of last year. The skirting market was described as “moderate”.

Meanwhile, demand for the MR and FR forms of MDF appears to have been stable and price weakness has been far more limited. According to one manufacturer, strong global demand for some of the chemicals used in FR MDF was creating upward price pressure and an increase in FR MDF prices could be “around the corner”, he said.

As for veneered MDF, demand has failed to maintain the levels established earlier this year. However, while some contacts reported softer prices, others claimed that price weakness was not an option because margins were already under severe pressure as a result of, among other factors, the high cost of quality veneers and of transport. One source pointed to evidence of cheaper veneered MDF coming into the UK but argued that the quality was questionable in some instances. He said: “We put our prices up in April by 5-6% – and we got that increase because customers generally understand that everyone’s costs are going up. There is no way we can lower our prices: if prices go down, so will the quality.”

Also in the veneered MDF sector, demand for FSC accreditation has become more marked, although the price premium is proving to be a barrier to sales. “People are asking for it but they are reluctant to stump up the additional cost,” TTJ was told.

Stock reduction

In the current economic environment, positives are proving ever more difficult to find throughout the MDF market. However, according to one of the leading domestic producers, some leading merchants have been running stock reduction programmes which, he felt, must be nearing their end in some cases. As a result, there was the possibility of a return to more normal consumption patterns in the not-too-distant future, he said.

The only economic bright spot identified in the recent CIPS survey is that cost inflation has shown signs of having peaked, with input prices rising at a slower pace in July compared with the previous month.

However, this is a tenuous offering to panel manufacturers, one of whom acknowledged an element of “plateauing” costs – but at levels far higher than a year ago. Oil prices may have stabilised, he said, but MDF producers were likely to face the same “telephone number” energy bill increases as the public when their contracts came up for renewal.

The rising cost of chemicals has been described as “a disaster” while downtime itself represents a major cost since, as one producer said, “the overheads don’t go away” when the machines are off. This situation rendered price cuts “absolutely unsustainable”.

One of the more positive factors for UK producers has been dwindling pressure from imported board, although volumes have continued to come in, notably from two Spanish manufacturers. With economic woes even more pronounced in many of the leading European markets, the UK is regarded by some overseas producers as an opportunity to move some volume. However, these suppliers “must be hurting”, TTJ was told, “because they have the extra transport costs and the pound/euro exchange rate to contend with”.

During the summer holiday season, some plants on the Continent are shutting down for as long as three weeks. And already this year, downtime has become “the norm” among producers on mainland Europe.

As for MDF arriving in the UK from beyond Europe, “it isn’t happening and it isn’t going to happen”, TTJ was told by an importer, “because the freight cost is killing it.”

Export opportunities

Asked about export opportunities for MDF, there was a mixed response from domestic producers. One senior figure said that his company had been able to exploit the “currency advantage” to ship board to markets that had previously been served by producers in the euro-zone. But a spokesperson for another of the three domestic producers argued that viable export business was proving hard to find, not least because the economic downturn was now affecting most parts of the world. “The Middle East is a big construction area but it’s difficult to get business at the right price,” he said, adding that covering the associated transport costs was proving “impossible”.