MDF sales rise but sector cautious of false dawn

Summary
• MDF producers have raised production slightly.
• Manufacturers may raise prices early next year.
• The most recent price increase began to impact on end users in the last few weeks.
• The sterling/euro exchange rate means there are few imports into the UK.
• It is providing export opportunities for UK producers.

Higher sales, an increase in product values, the emergence of lead times and a noticeable upturn in customer confidence are being hailed as tangible signs of improved conditions for the MDF sector.

However, with analysts sending out confusing and often conflicting signals about the future course of the economy, few within the MDF market – including the producers themselves – are daring to believe that unbroken, sustainable growth lies ahead.

A senior spokesperson for one of the leading domestic producers confirmed that he is “low on everything” in stock terms. “We have lead times of up to two weeks in certain areas – but it’s all very tight,” he said. Market conditions had improved sufficiently for him to increase his plant’s capacity utilisation rate from below 70% when the economic and financial crisis was at its most intense to around 80% at present, he added.

A wide range of contacts have reported significantly stronger sales for laminate flooring, as well as a steadier flow of orders for raw board, melamine-faced and veneered MDF, with the shopfitting, furniture, joinery and refurbishment sectors said to be experiencing greater levels of activity.

Nevertheless, the same producer said: “I don’t trust the market yet. We are seeing an improvement, but we expect that improvement to be very, very slow.” He is concerned about rising unemployment levels, about lack of expenditure on major projects and, in market-specific terms, about how MDF sales will perform during the traditional pre-Christmas trading lull in December and during the first quarter of next year.

Spring price rise

Domestic MDF manufacturers implemented an average price increase of 5% in the spring of this year and followed up with another of similar magnitude in the late summer; in both instances, the increases were focused on the standard and MR versions of MDF.

Given the persistent uncertainty about the direction of the market in the medium term, the same producer anticipates that the next price increase is likely to be delayed until either January or February. “I don’t want to kill the market,” he declared. For this reason, the increase is also likely to be relatively small in nature, he added. Perhaps unsurprisingly in a still quite nervous market place, postponement of any further increases until 2010 is widely regarded as the most appropriate course of action.

At another of the domestic producers, utilisation rates have been as low as 75-80% since the onset of the recession; but now, as demand allows, the company is achieving “reasonable production with no curtailments”. A senior spokesperson said that stocks are “under control” and that lead times are “pushing prompt”.

General upturn

Noting that “we are cutting our cloth to suit market conditions”, he identified a general upturn in activity levels and demand, but said the overall improvement in MDF order files has been relatively “slight”. And he added: “We are still worried about this being a false dawn - that’s something we still don’t know.”

Asked when the next price hike is likely to be implemented, he did not rule out a pre-Christmas move but was quick to add that any change would be dictated by market conditions and that an increase for January 2010 business appears to be the more realistic option. Again, this is likely to be of around 5%, he added.

It is clearly significant that all market players expect the next move in the MDF price to be upwards – an acknowledgement, no doubt, of the pressures facing producers. One manufacturer noted: “People are expecting price inflation rather than price deflation. Most of our customers would accept that we are putting more valu\e back into their businesses – we certainly need another increase.”

Rising costs

As on many occasions in the past, manufacturers are facing higher wood and resin costs, while the arrival of the winter months is expected to trigger further increases in their energy bills; however, they are now also confronted with fixed overheads that do not diminish even when plants are not at 100% capacity. “That means our unit costs are higher too,” one company told TTJ.

The most recent price increase has begun to impact on end users only within the last few weeks, and opinion differs as to how successfully this has been absorbed by the market.

While some producers and distributors claim the higher prices have gone through with relative ease and are now “established”, one leading figure in the distribution chain countered by saying: “We are struggling big time to put it through to customers.” However, most agents, distributors and even consumers appear to understand the necessity for MDF producers to reinject some of the lost value into the sector.

To amplify this point, a leading distributor pointed out that, in pure price terms, MDF is significantly cheaper today than it was almost two decades ago.

Another producer said MDF remains an essential component of any timber distributor’s portfolio, adding that his own com-pany’s sales volumes are almost exactly the same for the first three quarters of 2009 as for the corresponding period in 2008. He explained: “You can’t walk away from MDF but it’s the go-with that you look to make your money on.”

In effect, MDF is widely regarded as “something of a loss-leader” – despite its many technical virtues and versatility. It is therefore imperative to drive further value into the product chain, added a producer. For this reason, there is frustration within the market place that “some people are giving away their margin”.

For those companies heavily involved in selling MDF, the return of lead times of any sort is worthy of celebration. Below-capacity production levels have also squeezed the availability of some specifications of MDF and so this should be “a good period for distributors”, TTJ was told.

Reduced imports

Meanwhile, domestic producers can draw comfort from the fact that the strength of the euro in relation to the pound has resulted in only very small quantities of MDF entering the UK market from the Continent; the cost and availability of the associated transport is also proving to be a serious obstacle for would-be overseas suppliers. The end result is that almost all of the material coming into this country is emanating from manufacturers with an established presence in the UK market.

The swing in the exchange rate has also paved the way for export opportunities: one of the home producers said “we are just loading a boat now” while a leading UK distributor also acknowledged having made sales to the Continent because prices there are effectively higher than those in the UK by a margin significant enough to make the business attractive.

A UK-based representative for a well-known MDF producer on the near Continent said that the company’s prices have also been raised recently by between 5-7% as a reflection of increased costs and exchange rate pressures. He felt that, in the short term at least, this move is likely to deter some buyers in the UK.

Finding a balance

While order files have certainly improved compared with the dark days of late 2008 and early 2009, the impact of the economic crisis is claimed by at least one domestic producer to have knocked the MDF market “completely out of sync”, rendering it even more difficult to fine-tune production schedules to strike a balance between keeping stocks to a minimum and having sufficient material available to offer the market when, as has happened in the recent past, a small spike in demand comes along.

And in this context, here’s another interesting take on market conditions from a producer. Customers, he said, currently prefer to keep their inventories to a minimum but any significant upturn in confidence levels may prompt many to look to strengthen their stock holdings. If that happens serious issues will be raised “because we can’t make all that extra material overnight”.