• Raw board and T&G markets are quiet.
• MFC sales have been more robust.
• Price rises before early 2012 are unlikely.
• Industry representatives have scheduled another meeting with MPs to discuss the impact of biomass.
• UK chipboard exports are rising.
• In Europe chipboard prices are 10-20% higher than in the UK.

UK sales of raw chipboard have been noticeably flatter in recent weeks as buyers have become increasingly cautious, partly in response to unremittingly worrying economic news. “It is a bit quieter in the markets that consume raw board, and T&G is also less strong now,” TTJ was told this week.

Sales of melamine-faced chipboard have been more robust, with one leading producer confirming that its lead times had been extended to four or five weeks in October and that attempts were now being made to “bring this back”. In terms of chipboard consuming sectors, reasonably good demand is coming from the furniture industry which “seems to be pretty resilient” to the difficult economic climate, he added.

But overall, there is increasing evidence of customers putting a hold on orders “because they are not so concerned now that they will run out of material”.

Indeed, most chipboard buyers – and the buyers of their goods in turn – have reportedly become “much more risk averse” in reaction to the unresolved eurozone crisis coupled with relatively low growth rates in the UK. At the same time, however, “there is a lot of frustration among key accounts that we are almost talking ourselves back into recession”, said one leading chipboard producer figure. Although “money is still difficult to come by”, companies which survived the recession of three years ago “are leaner and better equipped to cope” with the prevailing market conditions, he said.

It would have been unusual even in “normal” years for domestic producers to be considering further chipboard price increases so close to the traditional Christmas-related lull in business activity. Given that the final quarter of 2011 is proving to be anything but normal, it comes as no surprise that the increases of, typically, 5-6% implemented in the third quarter appear certain to be the last until 2012. “Not before February,” was how one chipboard maker responded to the question about when the next hike was planned. “But that will depend on how the market develops – we will have to wait and see.” He also conceded that the business could take as yet unplanned production downtime during the Christmas period if sales became particularly sluggish in the interim.

Cost pressure

His counterpart at another domestic production operation agreed that there would be “no more increases before the end of the year” but said that price rises “across all products” were envisaged for “early in 2012” because the producing sector would remain under “a continuous pressure to try to recover costs”. And yet another producer commented: “The prices of panel products are unlikely to go down. What the industry has achieved [in terms of increases] over the last 18 months is still not enough.”

In releasing its results for the third quarter of 2011, Norbord indicated that overall panel demand in Europe had “softened slightly” due to slowing construction and retail spending, but that prices had continued to rise as a reflection of ongoing increases to wood, resin and energy costs. Chipboard prices increased 7% quarter over quarter and 20% year over year, according to Norbord. However, it went on to state: “Management expects European panel prices to moderate somewhat from the very robust levels of the past two years as both business and consumers react to the evolving sovereign debt crisis and increasing economic uncertainty.”

Indeed, many producers are expecting the “flat” conditions in many parts of the domestic chipboard market to persist well into the first half of 2012, although they are generally coupling this belief with the hope of an improvement by the second half of next year. The more pessimistic market contacts, notably those connected with Continental operations, believe that current flat conditions could persist for years rather than months. “It could be like this for three to five years,” said one. “Companies have to build their strategy around realism.”

Cost pressure

Sales prospects may be a subject for debate but nobody is expecting anything other than continuing pressure on the cost base and therefore a need to maintain chipboard price progression. Among the producers interviewed this week, one highlighted an increase in methanol costs of around 4% for the fourth quarter; and another estimated that urea costs had soared 40% during the course of 2011 and were showing “no signs of dropping”, largely because of strong demand from the fertiliser industry. The latter also pointed to a 20% leap in wood costs since the start of this year, adding that UK panel industry representatives have scheduled another meeting with MPs to discuss the impact of biomass subsidies on raw material prices and availability for long-established board producers.

Although the consensus is that the remainder of the fourth quarter will yield no major mood swing in the UK chipboard market, the period is scheduled to bring at least one significant development – the restarting of Sonae UK’s chipboard production line at Knowsley following the major fire in June. Having initially targeted the end of October, the company has put back by around one month the date for restarting 80% of production. This delay follows additional damaged electrical areas discovered during demolition work.

Asked about the likely impact of Sonae UK’s return to production, another producer pointed out that the Sonae Group had given customers an undertaking to ensure continuity of supply over this period. “The board is in the country anyway because they are bringing it in, so supply in the UK won’t be altered that much [when production restarts at Knowsley].”

In Norbord’s financial results for the third quarter, which were released in late October, the company pointed out that the weakness of the pound relative to the euro “has been advantageous to Norbord’s primarily UK-based operations as it has improved sales opportunities within the UK and slowed the flow of Continental European imports”, adding that “this currency trend has also supported Norbord’s export programme into the Continent”.

UK exports

Another UK-based producer confirmed this week that, from his own operation’s perspective, exports of chipboard are “on the increase”. He predicted a growing trend towards capacity losses on the Continent through line closures and regular periods of downtime – a development which is expected to help keep to a trickle chipboard flows from mainland Europe to the UK. Of course, imports are also being hindered by the fact that chipboard prices on the Continent are put at between 10-20% higher than those prevailing in the UK.

Latest figures from The Timber Trade Federation also reveal that, despite imports hitting a 2011 high in July, volumes of chipboard entering the UK fell 6.6% from 271,000m³ in the first seven months of 2010 to 253,000m³ in the corresponding period of this year; last year as a whole, imports amounted to 453,000m³. UK chipboard exports were 31.1% lower in January-July this year at around 68,000m³.

Looking back on 2011, producers contacted this week acknowledged that conditions became more difficult as the year progressed. However, their worst fears, which they held at the start of this year, have not been realised. One pointed to a “nice growth rate for most of 2011” which had exceeded expectations as all of his company’s chipboard product segments had achieved higher sales volumes than in 2010; and another noted that, despite a worsening picture, sales in October had been “over budget” and ahead of the levels recorded in the same month last year.

“We had a stronger summer than we had anticipated and it’s only in the last few weeks that the market has got quieter than you would normally expect,” he said.