Although the traditionally quieter Christmas period is fast approaching, some UK producers are talking up the medium-term prospects for chipboard, with mention even being made of price increases for the start of next year. However, for many other companies involved in the UK chipboard trade, recent months have been characterised by relatively uninspiring market conditions. “2005 has been no better than average for chipboard,” said one industry specialist. “Chipboard is in the doldrums and we need the trade winds to pick up.”
Preferring to focus on the upside, a senior spokesperson for one of the main domestic producers said that an attempt would be made to introduce a modest price increase of possibly 2-3% at the start of January. Noting that this would apply to standard board, furniture grades and possibly to T&G flooring, he added that rising costs were a major reason behind this bid to “test the market” although market conditions were also helping to justify such a move.
UK demand had been reasonably robust since the latter part of the summer – to the extent that his company was now quoting lead times of around two weeks on standard board. “This is the busy time of the year and we would expect current demand to continue until the third week of December,” he said. The company was planning to continue to produce chipboard throughout the Christmas period. However, the fact that Christmas Day fell at a weekend was likely to cause more disruption than usual to working and order intake patterns.
Fewer imports
Reasonable demand in other countries had reduced the flow of imports into this country over recent months – thereby impacting on the UK’s supply/demand balance, he said. Looking to the longer term and to the wider European picture, he said that the disappearance of old capacity and a lack of new production projects would combine to produce an even tighter supply situation in the future. There has been a trend towards manufacturers developing existing operations rather than ploughing their investment cash into brand new developments: for example, Sonae‘s investments in its Knowsley operation this year have added an estimated 12% to the plant’s overall capacity.
Another UK-based chipboard producer reported that it had been “completely over-sold” in October and that November had thus far been only slightly quieter in demand terms. And he said: “We haven’t had to sacrifice price to keep the volume.” Demand for raw board had been relatively strong while the T&G flooring market had been “very busy”, albeit at competitive price levels. Another domestic producer claimed his company was working to a lead time of two to three weeks on T&G flooring.
The melamine-faced chipboard market has been somewhat less strong because of overcapacity in the sector and the problems experienced by leading customers. “Volumes seem to have been below the expectations of most distributors despite this being the busiest time of the year,” one contact said. “We are hearing noises about possible price increases in the near future but I don’t think the market will take that much. Even limited increases would be accepted grudgingly.” It was also suggested that prospects for an MFC price increase would depend on the level of imports given that these were claiming around a quarter of UK sales.
Value-added strength
Most of the industry specialists surveyed this week pointed to “pockets of strength” within the chipboard market, particularly in “value-added products and the more unusual dimensions”. Also from the positive perspective, a senior spokesperson for a leading domestic producer said his company’s relatively strong recent performance owed much to its strategy of “picking customers according to where we see sector growth”.
At the same time, chipboard specialists have been reiterating their concerns at the troubles afflicting companies in some of the traditional chipboard-consuming sectors. The furniture industry’s struggles with imports and lacklustre domestic demand have been well documented, but other sectors are also feeling the effects of reduced consumer expenditure. Most recently, builders merchant Travis Perkins issued a profits warning, pointing to discounting by rivals as one of the causes of trading difficulties at its Wickes arm. The warning triggered substantial declines in stock values for other leading names in the sector, including MFI and B&Q owner Kingfisher. As one chipboard specialist noted: “What with B&Q and others finding the going tough, it just shows that Joe Public is not spending money on DIY.”
|
“The market fully recognises that the costs of producing commodity products are increasing faster than anything we are getting back. If there is an opportunity to put up prices, we will do it” |
Interest rates
There is a widespread hope that the Bank of England will look to implement an interest rate cut early in 2006 following its recent acknowledgement that consumer spending and business investment are likely to improve less quickly than previously predicted. The rate has been pegged at 4.5% since the 0.25% cut introduced in August this year.
While the performance of key customers has an obvious impact on business prospects, the tide of rising costs has been of even more immediate concern to chipboard producers – especially the phenomenal scale of energy price increases. A leading domestic chipboard producer said that he had to be reasonably content with having limited his annual electricity price rise to 36% given that other consumers were reportedly being asked to pay out up to 60% more. “Increases in gas and electricity costs are costing the industry millions of pounds,” said another leading figure.
As for other costs, resin prices have actually fallen for the fourth quarter of 2005 but, in effect, have risen by upwards of 20% during the course of the last year. Noting the recent price reduction, a leading chipboard producer argued that resin “was already at an artificially high level”. Transport costs also remain high despite the fact that oil has retreated from its recent peak. Several contacts also pointed to additional costs associated with the waste incineration directive; a leading chipboard producer estimated that these would amount to approaching £1m for his own company in 2006.
A prominent industry figure summed up the situation: “The market fully recognises that the costs of producing commodity products are increasing faster than anything we are getting back. If there is an opportunity to put up prices, we will do it.” Another contact insisted that “UK and Continental producers will have to introduce price increases in the new year” due to the squeeze applied by rising costs. And he added: “The more a material becomes a commodity, the shorter the lead time for a price increase. For chipboard, this period can be very short, especially in times of stress.”
Product evolution
As 2005 draws to a close, several contacts took the opportunity to ponder the industry’s prospects. One view was that the outlook for chipboard would depend to a significant extent on its ability to “take the next step” in terms of product “evolution”, such as through new product development or new technologies. “Raw board prices have been stable recently but they are still at a low level,” TTJ was told this week. “You need to have added-value products in your mix to give yourself a better chance of making a margin.”
Producers themselves are keen to stress the emphasis they are placing on product development and on adding value to their product portfolios. For example, Sonae has reported strong early sales for its Safedek safety flooring product and for its Mezzdek mezzanine flooring. “We are looking to launch another two value-added products in early 2006,” said a company spokesperson.
Some crystal ball gazers also suggested that the future might bring a more restricted flow of imported chipboard. A domestic producer argued: “I think we will see some serious consolidation in central Europe and that should impact on import availability in the UK. Also, more material is being sold to Asia – so there is even less available for the UK.”
