Chipboard manufacturers have been reasonably satisfied with consumption levels in the UK during the early weeks of 2006. One producer reported a seasonal record in both sales and production levels, while another confirmed that, while demand had been significantly stronger in some areas than in others, combined order intake values were ahead of those registered in the early part of last year.

For once, however, achievement of that subtle balance between supply and demand has not been the major preoccupation for producers. Instead, rising costs have been the focus of attention; in addition to the well-publicised surge in energy prices which has burdened all types of industry, the chipboard sector has also had to contend with rising timber and resin costs over recent months. One producer said: “Despite hedging, we have seen a 30% increase in electricity costs since October last year; gas prices are double or triple what they were, depending on the month; and resin costs have gone up by 17% in the first quarter of this year, partly because spot prices of methanol have been hitting record levels. And it’s very difficult to pass on these extra costs.”

The chipboard industry could be forgiven for looking forward to the warmer months of the year when the pressure applied by energy costs will hopefully diminish. For the moment, however, manufacturers have responded by introducing early-year price increases – with the promise of more to come in the near term. Some producers have raised raw board prices by 5-8% since the start of 2006 while the upward adjustment of flooring prices has been on a similar scale.

In general, the price increases implemented on melamine-faced chipboard appear to have been more conservative. One leading manufacturer said that his company’s decision to limit its MFC increase to 3.5-4% was a reflection of overcapacity and of the difficulties experienced by many of its customers in the furniture sector.

Failing to keep pace

Producers insist that, despite these latest price increases, they are still failing to keep pace with costs. One producer confirmed that “we are still going backwards”, before adding that prices were still well below the levels prevailing in 2004. “This isn’t going to be the last of the price increases this year,” he said.

Illustrating the point, one manufacturer pointed out that it had yet to push up prices this year but was “in the process of doing so”. Another acknowledged that its melamine-faced product prices had yet to rise this year, but that increases were under negotiation and were likely to come into effect by the end of the first quarter at the latest.

According to one senior producer spokesperson, his firm had raised its prices by around 5% this year on some of the higher volume chipboard products such as P1 and P2. However, smaller percentage increases had been imposed on some selected, higher-value items “where we have been getting a better margin” in a bid to leave the market as undisturbed as possible.

Some distributors are reportedly nervous about the introduction of significant price increases so early in the new year. However, most appear to accept the reasoning behind it. The general feeling is that prices will end 2006 at levels higher than at present, largely irrespective of how demand progresses. “Prices will have to rise of necessity,” said one contact, “otherwise there will be casualties.”

It is expected that further price increases of at least 5% will be required simply for the production sector to “stand still in the face of all these cost rises”. The same source added: “Demand in January and early February was quite good but prices were entirely ludicrous. The risk is that, if one company puts its prices up, someone will do the business at the previous price or at an even lower one. We have walked away from business because prices are just ridiculous – and we know of others who have done the same.”

&#8220Demand in January and early February was quite good but prices were entirely ludicrous. The risk is that, if one company puts its prices up, someone will do the business at the previous price or at an even lower one. We have walked away from business because prices are just ridiculous – and we know of others who have done the same”

Sensible price increases

Manufacturers are also extremely aware of the need for sensible price increases given that many of the companies they supply are coming under increasing price pressure from their own customers. “Some have already gone out of business and others are experiencing tight times,” said one.

And there is also concern that, by lifting prices in a bid to cover costs, they may be opening up wider opportunities for imports. “We are still about 8-10% shy of the crucial figure,” a leading domestic producer said this week. That said, another leading manufacturer believed imports were not a major threat at present for two main reasons: firstly, supply and demand were achieving a more reasonable balance at present on the European mainland; and secondly, Continental producers were “finding more lucrative markets [than the UK] closer to home”. It was reported this week that demand has been particularly strong in northern Europe since the start of the year.

While deeply concerned about sky-rocketing costs, most manufacturers appear relatively comfortable about the chipboard supply-demand equation in the UK. While some opted to continue producing chipboard throughout the Christmas period, others took the opportunity to carry out planned maintenance – including Sonae which stopped production for six days. Having spent heavily on the Knowsley site in 2005, the company confirmed that it had set aside a further £2m of capital for improvement projects during 2006.

Putting to one side the burden of rising costs, most producers appear reasonably optimistic about UK market prospects for 2006. Housebuilding rates are expected to quicken this year and the chipboard industry is expected to benefit from, in particular, continued growth in the timber frame sector. Some elements of the furniture trade – but certainly not all – appear to be quite busy, while a marked upturn in the retail sector is also widely anticipated. However, the DIY market still seems to be slow and merchant demand was described this week as “not so good”.

Positive outlook

The European Panel Federation is also adopting a generally positive outlook for early 2006, while also acknowledging that ongoing cost increases represent “a cause of concern for most producers”. Its latest statistics show that a minor recovery during the second quarter of 2005 failed to prevent an almost 2% decline in chipboard production during the first nine months of the year. Output fell by 4% in the first quarter of last year and by over 2% in the third quarter; meanwhile, demand slid more than 5% in January-September 2005 compared to the first nine months of the previous year.

Egger UK is still aiming to begin work on the £100m investment programme at its Hexham facility during the spring. A spokesperson confirmed this week that all of the planning approvals had been acquired for the project. The initiative involves the installation of a state-of-the-art ContiRoll continuous production line, start-up of which is scheduled for 2007. As mentioned previously, the P2 and P5 grades are set to remain the major focus of chipboard production at Hexham where capacity currently stands at around 440,000m3 per year.

Egger’s first chipboard production venture in Russia is now fully operational. Located at Shuya, 100 miles north-east of Moscow, the facility’s melamine capacity started up last summer while raw chipboard production on two lines started towards the end of 2005.

Also late last year, Pfleiderer AG completed the acquisition of the engineered wood activities of the Kunz Group in Germany and North America for around €192m. The deal includes chipboard plants at Ebersdorf and Gschwend in Germany which together produce around 750,000m3 of raw chipboard.