Christmas trading gives UK producers optimism

If 2006 is to be remembered for concerns over energy prices, then dwindling supply and spiralling costs of raw material are likely to be dominant themes in the MDF sector throughout 2007. Softwood prices increased by an estimated 30% during 2006 and domestic MDF manufacturers are painfully aware that there is almost certainly more to come.

The lack of wood supply has already forced several plants in Continental Europe either to stop or to curtail production; for example, a producer in Romania has just reopened after closing for six weeks simply because no timber was available to it. This dearth of wood and residues supply is attributed to two principal factors: a mild winter to date throughout many parts of Europe which has led to logging difficulties and also to processing problems associated with the timber having a higher moisture content; and increasingly strong competition from an expanding biomass sector which is generally offering higher prices.

New biomass plants due to come on stream in the UK this year will add to existing pressures. “Biomass is starting to impact on raw material supply and it’s something that we as an industry are going to have to address,” TTJ was told. “He who pays the most is going to get the wood and, at the moment, the biomass sector is willing to pay more.”

Lead times

On the domestic front, the three major MDF manufacturers confirmed this week that raw material availability had not yet had a major impact on their production schedules. Lead times are between one and two weeks except for a limited number of specialist products; this compares to, in some instances, upwards of 10 weeks on the Continent. Nevertheless, domestic producers recognise wood supply as the major driving force behind MDF price increases, the latest round of which took place in early January and included double-digit percentage hikes on some products.

According to one of the leading domestic producers, his company had raised most of its prices by between 6-10% at the start of the year, although increases of up to 20% had been introduced for materials “where some catching up needed to be done”. He also noted that the company’s MR MDF price had risen by “up to 10%” – a reflection of the fact that the markets for both MR and faced MDF were “very strong” and “constantly establishing new records”. He added that, by contrast, the laminate flooring market was “static”.

Another domestic producer confirmed that its standard board price had been raised by 5-7% at the start of January while MR MDF levels had risen by 8-10%. And the third of the UK’s three domestic manufacturers revealed that price increases averaging 5% had been implemented for standard and MR material.

Domestic producers are generally upbeat about the strength of the MDF market going forward. “We are cautiously optimistic – especially as we easily overcame the often difficult Christmas period,” said one. Another concurred: “It was a fairly slow start in the first two weeks of January, but the last two weeks have been very busy and we expect to finish the month very much on budget.” He added that demand was reasonably strong across the board, although order levels from the furniture sector were still being adversely affected by competition from China. The third of the domestic MDF manufacturers described early-year demand as “surprisingly good”.

Further price increases

And so when might the market expect the next round of increases? A leading figure at one of the domestic plants said: “We will be looking for price increases again in February of around 5%.” However, the other two domestic producers preferred to adopt a more non-committal approach. A senior spokesperson for one of them said: “There is enough scope for an increase for the second quarter but it may happen sooner than that. It depends on how the costs move.” And the other commented: “I wouldn’t rule out a further increase by the end of the first quarter.”

Further along the chain, many accept that the writing is already on the wall. A leading distributor said this week: “I would be amazed if it goes beyond the end of March before we see any more increases.”

While the cost of wood supplies is of deep concern for MDF producers, they are quick to point out that this is not the only factor behind the ongoing price rises. For example, methanol prices were expected to fall in the first quarter but have failed to do so. Significant increases in resin prices appear to be in the pipeline despite a reduction in the price of oil, with a Continental MDF producer said to be budgeting for a 13% hike in the first quarter alone.

Energy prices were dominating MDF producers’ thoughts at this time last year. And even though relatively mild conditions this winter have alleviated the threat of similar energy price spikes, there are fears that any prolonged cold snap could see a return to massively higher energy costs.

One of the domestic MDF manufacturers said: “Our total price increase last year of around 20% was almost totally consumed by additional costs.” This was unsustainable, he argued, for an industry that required substantial ongoing investment to maintain existing plant or to add essential new equipment.

Addressing the same theme from a different angle, another contact recalled that raw MDF had been priced at around £220/m³ as far back as the early 1990s – significantly above today’s levels.

Imports reduced

On the upside, the pressure on raw material supplies has prompted MDF prices to rise even faster on the Continent than in the UK, with the result that the flow of imported board is almost non-existent. Indeed, prices on the European mainland are reportedly up to 10% higher than those prevailing in the UK. Clearly, overseas producers have little interest in shipping to the UK – especially when this would involve higher transport costs and when demand nearer to home is perfectly adequate to absorb whatever output they can muster. According to a leading importer, the small amounts of MDF coming into the UK have been originating from established suppliers who are looking to maintain a foothold in the market. “But otherwise, there is next to zero coming in,” he said.

With the supply pipeline likely to remain constrained for the foreseeable future, several contacts suggested that spot buyers of raw MDF “could come unstuck”. And perhaps slightly tongue in cheek, a supplier of foreign-made MDF added: “Buyers would do well to look after their suppliers this year or they might not get any material.” As a sign of the times, he added, his own company was receiving plenty of calls from prospective customers who “we have never heard from before” and who “we have got nothing to offer”.

Also indicative of the strength of this supply-led market is that, unlike in the past, price increases are generally gaining more ready acceptance in the market. A supplier of veneered MDF commented: “Very nervously and after a lot of deliberation, I decided to put up my prices by 4% just to cover the increase on the MDF – but business is still booming.”

Since our previous report, final agreement has been reached on the purchase of the 400,000m³ per year MDF production facility at Clonmel by Irish state forester Coillte. Discussions are now taking place between the Medite operation and sister company SmartPly to ascertain “what synergies are available”, TTJ was told.