In our final MDF report of 1999, we used the classic London bus analogy to describe the market: you wait ages for a price rise and then two come along in quick succession. It will come as less than a surprise to learn, therefore, that MDF is sticking to a similar script at the end of 2000, with the 8-9% price increase introduced from the start of October about to be supplemented by another round of rises – put at between 7-9% – which are scheduled to come into force from the start of next year.
Kronospan has already alerted its distributor network that a price rise based on discount reduction is to kick in from January 2.
Meanwhile, another of the ‘big three’ domestic MDF producers said its approach to near-term pricing was being finalised and would be announced shortly, but that the likelihood was of a 7-8% price increase from the start of next month.
There appears to be a compelling and almost unanimously supported argument in favour of further price increases. ‘All the signs are there,’ said one source, ‘that everyone is determined to make the higher prices bite. It won’t be rushed, it will be steady, because everyone is keen to avoid the yo-yo effect.’
In practice, the new levels established at the beginning of October have met little or no resistance. As a tacit acknow-ledgement that prices will continue to rise, some buyers are now looking to establish longer term pricing arrangements for their MDF – but the manufacturers are not keen to go down that particular route.
The cost pressures on manufacturers have become ever more burdensome and, according to domestic producers, will need to be passed on. The cost of all oil-related materials used in the manufacture of MDF have ‘spiked up dramatically’, while the price of gas has increased and is expected to go higher still in the near term. At the same time, MDF demand remains reasonably strong, not only in the UK, but also across most of mainland Europe.
Even allowing for the MDF price increases scheduled for January, the standard product will still be 15-20% below what one senior UK manufacturer representative considered to be a realistic level. With cost recovery pressures unlikely to diminish, he felt that the MDF price could recover much of that ground over the next year – especially as the unrelenting growth of laminate flooring was creating a huge demand for thin MDF which was likely to put ever increasing supply pressure on some of the thicker MDF sizes. Indeed, several contacts this week spoke in terms of shortages emerging during the course of 2001.
Meanwhile, the same domestic producer concluded: ‘2000 saw a significant period of deflation and we are a long way away from the heady days of five years ago when prices were effectively double what they are now. In 2001, we are looking at a period of inflation driven by increases in our cost base.’
He believes the next upward movement after January could come as early as the second quarter of 2001, not least because the cost pressures on MDF manufacturers were set to intensify through the introduction of the climate change levy. His own company is budgeting for an extra cost of more than £1m per year as a direct result of the levy.
His belief that prices would continue to rise throughout most of next year was broadly supported by a senior spokesperson at another of the major domestic MDF producers. Taking 18mm material as his example, he suggested that the price was currently at around 60% of its peak level established in the mid-1990s. And while it was unlikely – and perhaps unreasonable – to expect those peaks to be scaled once more – he considered that the product still sat at 70-75% of its realistic value. He went on to comment: ‘It has been a torturous year of high volumes but low values, and we are looking to 2001 to reverse the trend.
‘There will be a further requirement to pass on these rising costs and I would expect the price to be at least 20% higher in a year from now.’
While some might regard this prediction as optimistic, no-one is debating the fact that higher prices have re-injected some much-needed value into the MDF sector. The October price increase has been sustained without too much difficulty, although one major domestic producer expressed concern that some distributors, having clamoured for higher prices, had subsequently ‘not practised what they preach’ by failing to ‘move the new prices more quickly into the market’.
He added: ‘Some distributors seem to think this isn’t going to last but the message is clear – we are in an inflationary period.’
On the whole, however, the market has understood the logic behind the price increase and most distributors have ‘welcomed the chance to get some value back into the MDF business sooner rather than later’. It was unreasonable for MDF buyers to expect ‘zero inflation’ given the cost pressures at the production end. Profitability has been one of the victims of the recent price falls, it was pointed out by several contacts this week, and a continuation of these lower price levels would ultimately have led to an MDF market collapse that would have suited nobody’s purposes.
Achievement of a better balance between supply and demand has been assisted by reasonably strong demand for MDF across most of mainland Europe, which has given Continental producers less of an incentive to export to the UK. At the same time, there have been some export opportunities for domestic producers – notably in the Middle East.
Looking ahead, there is not a great deal of fresh MDF capacity due to come on stream throughout Europe in the next 12 months. As one domestic producer put it: ‘There are not a lot of new capacity announcements for next year because recent developments in MDF have been too painful.’
Indeed, recent weeks have even seen capacity taken out of the market. Kronospan has acquired the kit from a Junckers MDF plant in Denmark which had an annual capacity of around 150,000m3. According to a spokesperson for the buyer, the plant is not in production at the moment and the company is assessing ‘one or two projects around the world’ in which it might be used.
Despite the ‘painful’ experiences, the overall trend in MDF remains upward. At a recent meeting of the European Panel Federation (TTJ December 2), it emerged that consumption in Europe as a whole jumped by 18% in the first half of this year, with experts predicting second half growth of the order of 15-18%. One told TTJ: ‘Demand for MDF continues to be consistently strong and consumption is on a very positive growth curve.’
The most enthusiasm was reserved for laminate flooring. Large volumes of MDF are already being consumed by this sector, and yet laminate flooring still accounts for only a 7% share of a European flooring market that also features carpeting, tiling and linoleum. ‘There is still serious upward potential in laminate flooring,’ said one domestic producer this week.
Sonae UK has confirmed that commissioning is complete on its 6 million m² per year laminate flooring line at Knowsley and that it is ‘winding up towards full production’. Meanwhile, Kronospan is predicting a second quarter 2001 start-up for its proposed new laminate flooring plant at Chirk, which will double overall capacity at the site from 6 million m² to 12 million m². The UK market for laminate flooring is expected to reach around 24 million m² this year. Meanwhile, recent figures released by the Association of European Producers of Laminate Flooring (EPLF) indicate that 134 million m² of the product was sold across Europe last year – making it the largest market in the world. European demand is said to be 190% higher than that in the Asia-Pacific region and 340% higher than in North America. Consumption in these areas totalled 46 million m² and 39 million m² respectively last year.
As mentioned earlier, standard MDF imports into the UK have become something of a rare breed. One agent said of his prospects for clinching sales of standard MDF in the UK: ‘I would need to be able to get another 10% to sell here, and even then the currency would have to move in my favour.’ But while standard MDF imports have dwindled, there has remained a ‘steady’ inward flow of special products – such as veneered MDF.
One agent summed up the position thus: ‘I am highly specialised and it has been a good steady year for me – but I haven’t sold any standard MDF into the UK nor any laminate flooring. I used to sell flooring but the big guys have moved in and now sell it at knockdown prices.’ He regarded this as yet another example of the timber trade ‘spotting a good sectoral opportunity and then pressing the self-destruct button’.
A similar sentiment came from a leading player in the MDF mouldings sector. ‘It is good to see supply and demand getting back into balance,’ he said, ‘but the next news will likely be that they will be screwing it up by introducing new capacity.’
The mouldings sector itself appears to have enjoyed a reasonably good year in terms of volumes but business has been undermined by lower sales prices, with one leading player in the market noting drily: ‘Our volumes are up 30% but our turnover is not.’ To make matters worse, business has been ‘grinding to a halt early this year,’ said another. ‘There is far too much Christmas spirit around already and too many people clearing their desks before December has even started.’
The new build and refurbishment markets are still consuming large quantities of solid timber and so there is still plenty of potential for conversion to MDF mouldings. However, the low cost of imported solid timber has had a dampening effect on MDF mouldings during the course of this year. At the same time, the mouldings sector itself has become ‘far more competitive’.
Buoyed by more positive prospects for 2001, the MDF sector is generally delighted to be bidding farewell to the year 2000. Asked how the past 12 months will be recalled in MDF circles, one contact encapsulated the general view thus: ‘It won’t be remembered with too much fondness. It has been a savage year in many respects given that prices collapsed yet again.’ Another ventured to say: ‘The market slid very quickly – now we have got the slow grind back up the hill.’
