Summary
• Reduced demand may prompt some producers to withdraw capacity.
• In the UK, Kronospan and Sonae have taken scheduled downtime.
• Manufacturers are facing rising costs, including a doubling of urea prices in the past 18 months.
• MFC prices are holding up in comparison with raw board and T&G.
• UK imports have fallen because of the strength of the euro and higher shipping costs.

Following a prolonged period of strong demand for chipboard, the impact of a downturn in the housing market and of wider economic woes has truly begun to bite – to the extent that several leading industry experts are forecasting “casualties” within the chipboard sector and a significant rationalisation of the European industry.

While the healthy sales conditions of recent years had encouraged manufacturers to persist with dated technology in some instances, the recent sea change in market conditions was likely to prompt many of them to rethink their positions – particularly on the Continent, said a senior spokesperson for a major UK producer. Since high levels of investment were required to bring production methods up to the most modern of standards, the likelihood was that many producers would choose instead to withdraw capacity from the market, he said.

Genk closure

These views recalled the sentiments expressed by Norbord Inc when announcing the closure of its chipboard line at Genk earlier this year. The Genk facility had been acquired primarily to expand the company’s OSB presence in Europe but, in the light of healthy market conditions, it had been decided to persist with “non-core” chipboard production despite the fact that this was based around older technology. However, with the return to “more normal product prices”, the company had opted to focus solely on OSB production.

Although lower prices have been reported within the UK market place and producer stocks are said to be high in certain cases, some domestic chipboard manufacturers are claiming to be persisting with their resistance to downward price pressure and to be “adjusting production capacity to market demand”.

Kronospan downtime

At the Kronospan facility in Chirk, a week of downtime was implemented in July and production is scheduled to stop for a similar period in August, a senior company spokesperson confirmed this week.

These latest moves follow periods of downtime at Chirk in December last year (12 days), late February/early March (10 days), April (7 days) and the early part of the summer (7 days).

The spokesperson said: “There is no sense in keeping on making the material if it cannot be sold – you cannot create demand through price.” Prices in the market place had weakened, he added, but only to a limited extent.

“Four or five days” of downtime was taken at Egger UK’s recently-revamped facility at Hexham towards the start of the summer, although a spokesperson made clear this was for “planned maintenance”.

Meanwhile, in the case of the Sonae UK factory at Knowsley, six days of production downtime in June was followed by a further seven-day halt in July; again, these stoppages followed similar moves towards the end of 2007 and earlier in 2008.

In common with Kronospan, Sonae UK is scheduling a further seven-day stoppage for August “at which point we will review the situation”, TTJ was informed this week.

Volumes down by 20%

&#8220Oil prices have gone down in recent weeks but we are paying more for our gas and electricity in the summer months than we were in the winter”

According to a senior company spokesperson, volumes are some 20% lower compared to the corresponding period of 2007.

He added that the periods of downtime were significantly reducing the facility’s demand for timber but that there was an absolute imperative to “resist any decreases in selling prices”. Dropping prices would not generate additional revenues, he maintained, “because the business just isn’t out there”.

One of the main reasons why manufacturers have been striving to preserve chipboard prices is, as ever, the need to defend themselves against the impact of rising costs. As reported previously, China’s decision to place a substantial export duty on urea has led to a drying-up of supply from this major source. This and other factors had doubled urea costs in the space of 18 months, according to one of the UK’s chipboard manufacturers. Another claimed that, following on from hikes in the second quarter of this year, resin price increases in the third quarter alone had added a further £4/m³ to his finished board costs.

Energy costs

Energy costs have also continued to be a focus of concern. One UK chipboard producer said that his bill would increase by anything up to 50% at the start of the autumn. Another complained: “Oil prices have gone down in recent weeks but we are paying more for our gas and electricity in the summer months than we were in the winter.”

This feedback ties in with the results of the latest industrial trends survey from the CBI which confirm that, in the last three months, average unit costs rose for 65% of manufacturers while they fell for just 7%. The differential of 58 percentage points is the highest since October 1980 and is attributed mainly to soaring oil prices which increased by more than a third in the preceding quarter alone.

Firms expect costs to increase at a similar rate in the next three months and are gloomier about business prospects than at any time since October 2001, according to the CBI’s findings.

Without doubt, the decline in demand for chipboard has been most noticeable in those products destined for the construction market – which one producer summed up as “a disaster”. Thus, order files for raw board and T&G are said to be particularly thin at present.

The shelving-off of orders from building firms in the UK had become especially pronounced with the arrival of the summer months, it was said in several quarters. One or two producers said that chipboard orders for the social housing sector were proving to be quite robust by comparison.

Elements of MFC weakness

Although melamine faced chipboard (MFC) sales were widely described as “not too bad”, a leading chipboard producer pointed to elements of weakness: for example, sales into the caravan industry had been hit by the drop in consumer expenditure. There is some talk of implementing MFC price increases in a bid to recoup manufacturers’ higher petrochemical costs

Some of the Continent’s regular exporters of chipboard to the UK have retained a foothold in this market. However, pressure from imported board has receded because of the strength of the euro in relation to the pound and of ever-increasing costs of shipping material across the Channel. Indeed, the relative weakness of the pound has led to success for several domestic manufacturers in exporting chipboard. With extended lead times a distant memory for producers throughout most of Continental Europe, further significant periods of downtime are envisaged here too.

Green award

To end on a more upbeat note, Sonae UK reports a good market reaction to the news it had made it on to the Sunday Times’ “Best Green Companies” list. Managing director Tony Hackney commented this week: “We have had a lot of positive response to winning this award. We have had enquiries from a new customer base. The fact that the listing was independently assessed and linked to the Sunday Times was a great accolade for us”, he said.