Summary
¦ Producers have generally raised prices twice this year.
¦ More price rises are planned.
¦ Producers’ costs have risen substantially.
¦ Lower output and the exchange rate are discouraging European exports to the UK.
¦ Energy generators’ subsidies for wood fibre continue to be a concern.

Their products may have become easier to sell but chipboard manufacturers have joined other members of the panels sector in insisting that their profitability is still under pressure. In effect, the beneficial impact of producers’ price increases has been wiped out by the ongoing surge in their costs.

One chipboard producer has followed up a 5% price hike in January with a further round of increases at the beginning of May. “This will be a minimum of 6% and up to 10% on some products,” said a spokesperson. Another producer introduced an average price increase of around 5% in the first quarter and had negotiated upward moves of between 8-10% for early May.

These price adjustments are replicated elsewhere: one chipboard producer contacted this week explained that his company had raised prices by around 10% over two separate pricing rounds during the first four to five months of the year; and another said its prices were now between 8-12% above their levels of October last year.

Further rises

All these contacts were quick to add that these second-quarter price jumps are certain not to be the last seen in 2010. One said that the next increase would be implemented “by the beginning of the autumn at the latest” while another said “we will be looking again for an increase by the autumn”. He added: “We are aiming at increases every three months – and we are telling our customers to prepare themselves for these.”

Another producer echoed the view that consumers should be prepared for higher chipboard prices. His own company is currently planning to introduce its third increase of 2010 “before the fourth quarter”, and he warned: “There will perhaps even be another one again before the end of the year.”

Chipboard manufacturers were unanimous in contending that these price increases leave producers in, at best, a “standstill position” given that “cost increases are coming faster than we can pass them on to the market place”. Their mood was perhaps best summed up by one producer, who said: “Price increases are not a wish list, they are now a necessity.”

This “necessity” is driven principally by two factors: the differential between UK and Continental chipboard prices; and, more importantly, the escalating cost burden.

Taking these in order, experts are estimating that raw board prices in the UK are 10-15% lower than those prevailing on mainland Europe. One contact said that P2 prices in the UK are “around 5% or 6% lower than in any other country in Europe”. From the positive perspective, this price gap and also the associated additional transport costs have deterred many Continental chipboard producers who might have been tempted to test themselves in the UK market. Imports have been restricted to “specials” and other products at the high-value end of the chipboard spectrum.

Several reasons have been put forward for this price differential. One contact pointed out: “There is not a lot of chipboard available for import from the Continent because of the consolidation and capacity cuts over there and because timber is short.” (An estimated 1.5 million m³ of capacity has been removed from Europe’s chipboard capacity over the last year or so.) Furthermore, he added, the sterling/euro exchange rate has provided another obstacle to the flow of material from the Continent into the UK.

Another senior chipboard industry figure argued that lower prices had developed in the UK “because people had fought to keep their volumes in the recession” and, subsequently, “no-one has wanted to destroy the recovery”. A counterpart at another plant chipped in: “The UK economic climate makes it more difficult to pass on price increases here.”

Rising costs

As indicated earlier, the principal motivation for chipboard producers to increase their prices has been the rising costs of timber, resin, melamine papers and haulage. One producer said his timber costs have leapt upwards of 25% since the fourth quarter of last year, but he was trumped by a spokesperson for another company who said that the increase since October last year had exceeded 50%.

Another fell somewhere in the middle, estimating the hike in his firm’s wood costs at upwards of 30% in the last six months. The cost burden had been particularly weighty at the start of the year, he added, because difficult weather conditions had prevented UK sawmills from operating at full capacity, thus reducing domestic wood waste availability. As a result, his company had been forced to import higher-cost top-up supplies.

While the impact on the different chipboard producers may vary, manufacturers tally in their identification of the root cause of the problem – namely, the government support which enables energy generators to buy their raw material at a lower cost. Political pressure is being applied to the government in a bid to help it understand the impact of this support on established wood consumers. A national campaign to highlight what is perceived as an iniquitous situation will be launched shortly by the Wood Panel Industries Federation.

As for the other areas of rising costs, one chipboard producer underlined double-digit percentage increases in his resins bill since the third quarter of last year and also pressure from hauliers for increases in running rates or for surcharges.

Of course, another key factor in the chipboard producers’ bid to restore greater value to their products is the upturn in demand. While experiences seemingly vary on the strength of the recovery in sales, all manufacturers contacted by TTJ confirmed that buying interest has improved since the start of the year.

Starting with the most bullish, one producer contact said this week that his own factory’s production was sold out “for at least the next two months”. An allocation system was in place for some consumers and “we are aligning closely with some industrial customers to make sure we ring-fence their volumes”, he continued. “We are moving away from the more unprofitable areas of business.”

This strategy helped the company achieve “record levels of productivity” in March and April, he added.

Other manufacturers were more conservative in their assessment of market conditions: for example, one described the overall increase in demand as “marginal” but acknowledged that certain sectors – including social housing and caravan building – are showing more pronounced signs of improvement.

As a general comment, he added: “We are still selling what we are making, and we are coming up with new designs and new products to help customers find lower-cost options.”

Some of the most encouraging feedback from producers surrounded T&G. Despite the fact that the construction sector overall remains relatively weak, one flooring provider pointed this week to a 25% increase in sales between January and March this year, such that the product is now on a four-week lead time.

Furniture demand

The same producer also identified “very, very strong” orders for furniture grade chipboard as well as full-capacity production of melamine-faced chipboard (MFC).

His counterpart at another factory reported a return to pre-recession raw board demand in March and April, with furniture grade material performing particularly well. Orders for MFC were termed “very good” too. Rather than demand falling well short of available supply, “we are pushing production now”, he said. “We are trying to keep stock items available but lead times are at up to three weeks on non-stock items.”

Another producer acknowledged that furniture grade sales had not achieved a “huge peak” but had improved markedly on the levels of last year. Overall, the first half of 2010 had been “quite positive” and lead times were sufficiently extended, he said, to suggest that producers “will not take downtime in the summer if the business is there to be had”.