Summary
• MDF prices have fallen by 10-20% since the summer and are now described as “unsustainable”.
• The price of MR, FR and veneered product has held up better.
• Most customers are unwilling to buy for stock.
• The weak pound is some help to UK manufacturers.
• Even more regular downtime is expected.

Traditionally, autumn is a prime sales period for MDF manufacturers but the fourth quarter of 2008 has been characterised by levels of demand that are “way down” on those of a year ago. And despite producers throughout Europe taking regular periods of downtime as a tool to control stocks and supply, prices have been trending downwards.

Since the summer prices have dropped by 10-20%, although some contacts said the figure was as high as 25%. More specialised forms of MDF such as MR, FR and veneered appear to have been less harshly treated by the price decline than standard board items but these are still significantly below their levels of only a few months ago. A senior spokesperson for one of the three domestic MDF producers said that the market is now “floating at or around the bottom”.

Price offers

This steep price fall has been attributed to two main factors: first, some manufacturers have been offering ever more competitive prices in a bid to keep stock moving out the door; and secondly, some customers have been taking advantage of this thirst for orders by driving aggressively hard bargains. One contact said that some producers have been “sweetening” prices generally in offering “redundant” stock items such as odd sizes.

Alleging that some business is being booked at prices below the cost of production, one supplier said he regretted the loss of MDF product values which had taken many years to build. And he added that “manufacturers would be better switching off their machines” rather than booking orders on this basis, not least because they would thus avoid the risk of not getting paid by an equally beleaguered customer base at the end of 60 days. In this context, credit has become an over-arching factor within the MDF trade.

With the vast majority of customers unwilling to buy for stock, demand has buckled in recent weeks. One leading UK-based supplier said: “Our main customers are smaller importers and merchants, and some are saying that demand is down by 70-80%.” Many traditionally high-volume buyers, notably in the building trade, have little if any work lined up for early next year, he added.

The few remaining pockets of reasonable, rather than healthy, demand could be termed “specialised” in nature: for example, some high-end kitchen furniture manufacturers have decent order books and are relatively active in the market, while a supplier of veneered MDF reported decent orders from some of his top-end joinery customers.

Unfortunately for the MDF production and distribution sectors, immediate prospects appear no more encouraging. Normally quiet sales months in any year, December and January are expected to yield even fewer orders as many customers opt to respond to their own demand crises with extended Christmas period breaks. “People will take more time off and I also fear a wave of exits [among the customer base],” said one domestic MDF producer. Another said that “not a lot of business will be done” between mid-December and January; MDF manufacturers are likely to respond, he added, with extended downtime around this period rather than producing for stock in the current climate. “There is still not enough business chasing too much production,” he said.

Stock v orders

Even in November, there was widespread evidence of customers relying on stocks rather than placing orders for material to arrive ahead of Christmas. “They just don’t want any more invoices landing on their desks before Christmas,” was a common view. And even those forced into buying are adopting a hand-to-mouth approach or waiting as long as possible before making a commitment “because they think tomorrow’s price may be cheaper”.

&#8220Many factors are outside the industry’s control. This will undoubtedly lead to a fundamental review of production and policy in the next three or four months”

With customers becoming ultra-conservative in their purchasing decisions, the pressure is also mounting on MDF manufacturers themselves, with some industry experts – both from within and outside the production sector – predicting that casualties may occur if current market conditions persist. “Many factors are outside the industry’s control,” said one expert. “This will undoubtedly lead to a fundamental review of production and policy in the next three or four months.”

Another contact also expected the remainder of 2008 and the first quarter of 2009 to be a highly significant period during which producers and distributors will be fighting to realign their stocks with diminished levels of demand. Unfortunately, he added, the desire in some quarters to move inventory at any cost has led to ever-softening prices.

One domestic producer said this week that his business had begun a stock reduction programme in March and was currently gearing production such that “we are making less product than we sell”. Nevertheless, “we have to respond to market prices” and these have contracted to “a level that is absolutely unsustainable”. And these lower prices “are not generating any more volume because the demand is just not there”.

Manufacturing costs

Line downtime may help to restrict MDF output but it also drives up unit costs since many of the producers’ overheads remain largely unchanged. The falling oil price is expected to lead to a reduction in the costs of related chemicals but substantial benefits have yet to filter through to MDF producers. At the same time, energy costs remain uncomfortably high.

For domestic MDF producers, sterling’s weakness against the euro and the dollar has provided respite in two ways: imports have slowed to a relative trickle; and the export door has opened slightly wider, notably beyond the eurozone. As regards export opportunities, producers are keen to stress that the volumes of MDF sold into these overseas markets are nowhere near large enough to compensate for the loss of demand at home. “The market is also relatively depressed wherever we are looking to sell material,” said one producer.

More specifically, one domestic manufacturer said that some of Europe’s MDF producers are supplying volume to the Middle East – but at prices he described as “dire”.

Perhaps more surprisingly, there was confirmation this week that at least one overseas producer of MDF is prepared to ship material – albeit in small volumes – to the UK. According to the importer, the containerised consignment due to arrive shortly had originated in the “southern hemisphere”. This is a clear sign, he added, of the imperative producers around the world are placing on moving material and of the demand weakness in many of those producers’ domestic markets.

Attitude hardening

Looking ahead, a number of leading players within the domestic distribution sector detected an apparent “hardening of attitude” among MDF producers that was likely to lead to even more regular downtime in the future as a means of stemming price falls. Of course, this has been welcomed by those who are already holding stocks of MDF and have been watching them lose value over recent months. A spell of “price intransigence” among producers is absolutely essential to the stability and longer-term prospects of the market, said one source.

According to major distributors contacted this week, their raw board volumes of late have fallen by as much as a quarter compared to the corresponding period of 2007. Faced with diesel costs which have not fallen in line with crude oil prices, many distributors are even declining to handle MDF “because it doesn’t earn its space on the truck”. And others are taking orders for MDF only when part of a booking including better-margin product. “We can’t make any money on it,” said one, “unless there is something else going with it on the truck, such as value-added decorated boards.”