Summary
• Fencing manufacturers are concerned merchants will want price reductions.
• New pallet demand is “exceptionally weak”.
• Concerns at customers extending payment terms.
• Home-grown small diameter roundwood is in plentiful supply.

“A year of two halves,” was how one large fencing manufacturer described 2011 so far. The exceptionally buoyant late spring when a proliferation of bank holidays, including the Royal wedding, combined with good weather to boost sales of fencing, was replaced with poorer sales from the end of May onwards.

“We found that from the end of May until August was a dramatic turnaround and we saw volumes drop away quite dramatically,” said the contact. For the manufacturer this resulted in stocks building up and going to a four-day week for a month.

Another fencing manufacturer admitted June and July had been disappointing, but that August was ahead of budget.

So why the drop off? An uncertain economic environment leading to low consumer confidence was an explanation, with the loss of Focus DIY another factor in volumes. So much early volume in the spring could also be factor.

The result is DIY retailers and trade outlets are keeping their stocks lean in the face of weak demand, with some smaller businesses buying to order.

One manufacturer raised an interesting point about the prices of carcassing and fencing. He’s worried that builder merchant customers don’t understand the differences in raw material price pressures and will see the recent softening in carcassing prices and expect to get their Fencing Products cheaper.

The manufacturer said raw material prices in small diameter fencing logs was still high, exacerbated by competition from the biofuel sector. But at least prices are stable and availability of wood is good. “I suspect it will be tough next year,” the contact said.

If the economy does pick up and there is a wind blow, he said there could be tightening of supply as few customers are holding any significant stocks and inevitably they will all expect product immediately.

Demand for agricultural fencing is reportedly good, with one manufacturer recently introducing double shift production for the first time in its 30-year history, on the back of securing two high-volume orders. This indicates to him customers are already building stocks for the early part of next year in anticipation of winter and early spring shortages.

Meanwhile, one fencing component supplier expressed concern about the slipping of customers’ payment terms. “Those people that have struggled to repay their suppliers during the spring and summer will have to stretch their payment terms,” he said.

He said managing accounts would be very important going in to the autumn. Demand, he added, was a “bit patchy”.

Meanwhile, fencing contractors are still in the doldrums with prices being pushed down by main contractors, according to Wendy Baker, chief executive of the Fencing Contractors Association. “Fencing metreage rates have gone back 15 years,” she said. “We have a few big companies that have secured work at very cheap rates.”

Sold at less than cost

She said product was sometimes being sold at less than cost and she was concerned at what kind of specification the client was getting, leaving some smaller contractors in a difficult position. The high cost of steel meant it was impossible to get a price until the steel had arrived at the docks, leading to some contractors looking at a timber security fence for some jobs rather than steel.

“I do not see any growth or any light at the end of the tunnel just yet,” said Ms Baker.

Weak demand for fencing is being mirrored by “exceptionally weak demand” for new pallets. “Demand is really bad, I’ve never known it to be so bad at this time of the year,” said one pallet manufacturer. “It’s a reflection on the state of the economy.”

He said many customers were repairing, recycling and buying secondhand pallets rather than buying new ones, while pallet pools are reportedly seeing lower volumes. With the shortage of work, manufacturers are cutting their prices, with some prices being quoted seemingly unsustainable. “It’s a dog-eat-dog scenario and I think it will get worse before it gets better,” said a contact.

Another manufacturing contact said the market was quiet and competitive. He said the silly prices being offered for new pallets was indicative of the overcapacity in the market relative to the amount of work out there.

He said the market needed the building products sector to pick up. Some of his customers have found some business supplying materials for the London Olympics but this work will finish next year.

The heady mix of overcapacity and weak demand gives rise to the question of further consolidation in the market. One contact thought this was a serious possibility.

On the raw material side, pallet wood prices seem to have peaked and are stable with a touch of softening reported. But the question is what will happen in the fourth quarter?

One contact thought prices would be stable in the last quarter, with home-grown material dipping a bit. The company, which also imports significant volumes of Baltic material, said the currency exchange situation meant Baltic pallet wood prices were unlikely to go down.

On the home-grown front, one forestry and harvesting contact reported stable pricing and plenty of small log availability. He described the small roundwood market as slow, which he believed was partially due to panel mills introducing quotas because of the large volumes of recycled fibre available. This is partially due to the recent fire at Sonae and some issues at other mills.

“But despite the excess of supply of small roundwood, sawmills are reluctant to cut prices because they know demand will heat up later in the year,” the contact said.

However, he noticed a slight softening in pallet and fencing wood. “There is not a frenetic demand for material at the moment.”