Summary
• MDF producers took extended downtime over Christmas.
• Business was slow in December as buyers ordered for January deliveries.
• It is estimated that raw board prices have fallen 30% since early 2008.
• The withdrawal of credit insurance on some customers continues to cause problems.
• Some producers are considering price increases as present levels are unsustainable.

Domestic MDF producers are being hit by a “double whammy”, according to a senior spokesperson for one of them. On the one hand, manufacturers have been implementing significant periods of downtime in a bid to control stocks and shore up prices at a time when demand is well below normal levels; but on the other, prices have continued to move downwards and have now reached “crazy” and “unsustainable” levels, producers say.

As many market specialists expected, the final month of 2008 proved to be an exceedingly difficult one for the MDF sector. Many customers were effectively placing orders for delivery in January “way back in the early days of December”, a producer said. “December was a non-event. Customers thought it was not worth putting stock on the ground in a month when a lot of businesses were going to be closing down [for extended holidays].”

MDF producers responded to these circumstances by introducing extended shutdowns of their own. One confirmed that its MDF production had been stopped for two weeks; in previous years, the facility would have continued to run throughout the Christmas and New Year holiday period, he said. Elsewhere, some MDF lines were stopped for even longer.

So what was the impact of this downtime? One domestic producer said that poor demand and extended downtime had effectively cancelled each other out to leave his inventory in a “neutral” situation; another said his company’s stocks were now at an optimum level.

False dawn in January

With a significant proportion of buyers choosing in early December to delay MDF deliveries until January, there was an inevitable upturn in demand at the start of the new year – to the extent that some producers and several distributors described trading levels as better than expected. However, they were all quick to add that order files were still somewhat thinner compared with the early weeks of a more normal year. “There has been more of a willingness to buy based on the non-buying in December, but the market is just trickling along – there is no real impetus,” a manufacturer said.

Another contact added: “The decision of many distributors to restock in the first two weeks of January created false hope for the manufacturers.”

A major worry is the continuing decline in MDF prices which, according to several sources, fell by “double-figure” percentages between December and late January as some companies in the sector strived to generate cash – in some cases, by booking business at below-cost prices. It is estimated that raw board prices have tumbled more than 30% from their pre-summer 2008 levels. At present, the price pressure is said to be particularly intense on standard, light and MR forms of MDF; meanwhile, prices of FR are proving to be more robust, although this product segment accounts for only a small proportion of the MDF volumes sold in this country.

There is general agreement that any further price fall is entirely unsustainable, but views differ on what is likely to happen next. Many distributors believe the manufacturing sector must be prepared to persist with – and even intensify – its policy of taking downtime as an inventory control measure. And producers agree that the option of temporary line closures is now a fixture on their agenda, with one stating this week: “We have no more downtime planned at present but it is under constant review. Stocks are where I want them but I won’t let them grow.” Another said that the issue is “being debated” internally and that any decision to take downtime will be based on the relationship between stock and demand at that moment.

Striking a balance

According to some MDF experts, domestic producers are clearly struggling to strike the correct balance between production downtime, demand and pricing. And they add that, if prices continue to fall, then the inevitable outcome will be capacity closures or even producer casualties.

Pressure on producers has been heightened by the withdrawal of credit insurance on customers with a track record of financial viability. “The continued non-support of credit insurers is causing real problems now,” one contact said. “Unless insurance companies are more realistic, we are heading for really troubled times.”

Against this gloomy backdrop, several contacts mentioned another near-term possibility for the domestic MDF market: price increases. TTJ was told this week that at least one leading European producer is planning a price hike for February. A senior spokesperson for a domestic manufacturer said his company is also looking to raise prices: “We are seriously looking at a price increase because we are at a level that can’t be justified any longer.” Another was more circumspect but offered the view: “I really do believe we are at the bottom of the market – any lower would be financially unsustainable.”

It is argued that lower prices have failed to flush out significantly more business and cannot be sustained in the longer term, not least because manufacturers are continuing to experience cost pressures. While some costs have remained relatively static or have fallen slightly, the controversy over Russian supplies has kept gas prices at a high level while the weakness of the pound in relation to both the euro and the US dollar has significantly diluted the impact of lower oil prices on their resin costs. “Our overall costs are higher than they were 12 months ago,” a domestic producer said.

There is widespread recognition of the urgent need for raising the value of MDF, although not everyone is convinced that price increases either represent the way forward or can be made to work. Several contacts said that they have no scope for raising their prices to their own customer base, which is committed to buying the smallest possible volumes at the lowest available price. “Unless everyone raises their prices at the same time, I can’t see it working,” TTJ was told.

Short delivery times

In a market where cash is king, customers are generally setting the ground rules for the largely hand-to-mouth business they are prepared to book. The situation was summed up by one supplier: “We are getting orders today and they are wanting delivery next week.” Several other contacts pointed out that end users are under no pressure to carry a single sheet in stock given that ample supplies of virtually any form of MDF are available for delivery within 48 hours.

These short delivery times from domestic suppliers and the aforementioned weakness of the pound have served to reduce UK imports from the eurozone to a comparative trickle, with incoming volumes limited mainly to those Continental producers with an established presence in this market. However, according to one trader, the steep drop in freight rates has tempted some Asian producers to ship product to the UK. “Some material has been coming into the UK in containers during January,” he said. “The volumes involved have not been large but they will increase.”

The currency factor has also facilitated UK exports of MDF. A domestic producer confirmed that his company has been able to find overseas customers for larger volumes than at the same stage of last year, notably to the Mediterranean region. “We are actively pursuing more export business,” he added.

But while the under-pressure pound is helping with business abroad, there are few other reasons for cheer among domestic MDF producers. There have been reports of a possible upturn in the building trade because certain housebuilders are thought to be near to exhausting their stock of unsold homes. However, as one MDF producer commented: “I keep reading about the green shoots of recovery in the housing market – but I can’t see where they are.”

Where MDF is concerned, nobody appears to be anticipating a significant improvement in business conditions until post-summer 2009 at the earliest.