Summary
¦ UK manufacturers are likely to raise prices before the summer.
¦ Lead times have been lengthening.
¦ Construction industry orders have improved slightly.
¦ Demand for veneered MDF is patchy.
¦ European imports into the UK have slowed markedly.

In early May, the UK’s MDF trade was holding its breath as domestic producers mulled over their pricing strategy for the near future. It was clear that the big three UK manufacturers have been considering the introduction of a further price increase ahead of the summer; however, no formal announcements had been made at the time of writing.

A spokesperson for one confined himself to saying that his company is “hoping to slot in another increase” of “around 5% ” prior to the summer. A counterpart at another of the home producers said that the company had not yet committed itself to an increase, before adding: “If there is one, it will be for June.”

One of the leading domestic producers noted that its most recent hike of 4-5% (around the turn of the first quarter) had applied solely to standard and MR MDF; however, a spokesperson said that increases on some of the other forms of MDF may have to be considered because of cost inflation. Another home manufacturer also told TTJ that, irrespective of what happens with standard board pricing in the near term, the firm’s MR prices will be raised again before the end of June – despite the significant hike implemented by the company back in April.

Meanwhile, a prominent MDF supplier into the UK market has written to customers confirming 10-15% price increases on all its products, to take effect for deliveries from this month. The reasons given were the rising costs of timber, fuel, chemicals and decorative paper, plus competition from biomass producers.

Sooner rather than later

With the summer fast approaching, most distributors seemed to be hoping this week that any price increase announcements by producers would be made sooner rather than later. As one leading distributor explained, increases take several weeks to bed into the system and it would be easier to complete this assimilation process ahead of – rather than during – the height of the summer holiday season. With domestic producers “generally selling what they are making” and with no pressure from imports, “I would be surprised if there wasn’t an increase before the summer”, he added.

However, a small minority in the trade disagreed with this forecast, including another prominent distributor who was clear that he expected no further increases until after the summer. “The full re-sale levels haven’t got into the market yet,” he said, adding that some in the supply chain have been reluctant to introduce price increases in full “for fear of losing market share”.

Several key factors will influence the decision on exactly when producers move their prices again, including the continuing upward creep in costs. While the bills for energy and chemicals have stabilised in recent months, albeit “at a high level”, timber costs have continued to mount – not least due to competition from the biomass sector, several manufacturers noted.

At the same time, pressure for higher prices is also being applied by capacity utilisation rates. One home producer said that his operation is “fully running” and that recent holiday periods had not led to a significant build-up of stock. In fact, producer lead times have been edging outwards in some instances; according to a leading distributor, MDF purchasers have over-bought ahead of price increases and have duly forced lead times further out.

One of the domestic MDF manufacturers confirmed this week that his company’s operation would be following its normal pattern and taking downtime for maintenance during the summer; however, a spokesperson also said that the intention was to take “the shortest stop possible” given that demand has been “above expectation” and that the plant is currently working “flat out”.

Holiday slowdown

MDF demand slowed in April – partly due to holidays – but is generally ahead of budgeted volumes. Orders from the construction industry have reportedly improved but remain “well short of earth-shattering”; descriptions of demand from the shopfitting and general joinery sectors have ranged between “steady” and “quite busy” while demand for kitchen applications is seen as healthy. One manufacturer also highlighted the boost received from projects relating to the 2012 Olympics.

Demand for veneered MDF has been termed “patchy” and prices have been moving ahead more slowly than for MDF itself – in part because producers are concerned about losing market share to melamine alternatives.

Although utilisation rates and costs are tending to push in the direction of higher prices, MDF producers remain aware that customers are under pressure too. A producer spokesperson said that the trend in prices would remain upwards but that care would continue to be exercised over this process. “MDF price increases are being governed by recovering raw material cost increases but, at the same time, we don’t want our customers to go bust,” he said. “Prices will keep going up – it’s just a matter of timing.”

Bad debts

Another prominent supplier into the UK market said there was also growing concern about bad debts. “The financial situation of some companies is getting tighter due to the length of time since the recession started, so we are expecting some further casualties in the near future.” Furniture manufacturers and distributors, in particular, were affected, he said.

At the same time, he also said “we are expecting MDF prices to continue to rise in the next few months”. Current prices are still “far away” from where they need to be, he added.

In its latest financial summary, Norbord stated that MDF prices in Europe increased on average by 2% in the first three months of 2011 when compared to the final quarter of 2010 – to a level 11% ahead of that prevailing in the opening quarter of 2010. The company also noted that the weak pound relative to the euro proved advantageous to the company’s primarily UK-based operations “as it has improved sales opportunities within the UK and slowed the flow of Continental European imports” (ttjonline.com May 3). And it added: “This currency trend has also supported Norbord’s export programme into the Continent. Particularly noteworthy was a 61% year-over-year increase in MDF exports to the Continent this quarter (January-March).”

Exchange rates

The sterling/euro exchange rate has served to improve the export opportunities for sterling-based MDF producers, with reports of business being secured not only in Continental Europe but also further afield. Of course, export prospects are also enhanced by the fact that UK product prices remain significantly below the average levels prevailing in mainland Europe.

The flip-side is that Continental MDF exports to the UK have reportedly “slowed from a trickle to a dribble”, with volumes restricted almost exclusively to special sizes and products not produced within the domestic market. Such flows have been “taken off the radar” not only by currency and price factors, but also by the fact that capacity is continuing to be eroded on the Continent at a time of steady demand. “UK producers have nothing to fear from overseas producers,” TTJ was told this week.

In the past, the onset of summer usually gave rise to a bout of bargain bookings at prices significantly below existing market levels; however, this element of seasonality has all but disappeared from the market. “We have not seen a lot of summer deals for a good few years now,” said one UK producer. Indeed, in looking even further ahead, domestic MDF producers were in no doubt that upward price progress will remain a key ingredient of the market for the remainder of 2011. One producer representative argued: “The emphasis is still on moving the price further forward. I can see at least one, two or even three more increases before the end of the year.”