¦ Raw material prices are forcing up MDF prices.
¦ UK MDF producers raised prices by 5-10% during January.
¦ Demand is at reasonable levels.
¦ The weak pound continues to favour UK exports.

MDF buyers in the UK should expect price hikes on a regular basis in 2011, as the market begins to digest the year’s first – but inevitably not the last – round of increases.

UK MDF producers implemented standard board and MR price increases of, typically, 5-10% during January. These moves are said to have been driven mainly by cost pressures although, according to many of the companies contacted this week, demand for MDF has been decent in the early weeks of the year – notably for refurbishment work and also for shopfitting as major retailers continue to resurrect projects shelved during the height of the recession.

While a range of costs is continuing to apply pressure on MDF producers, most are agreed that the principal financial strain is being exerted by timber prices, not least because of competition from the biomass sector and the impact of harsh December weather on logging activity. The rising price of methanol was also a sizeable factor, said one producer.

“If our prices had to go up according to our costs, they would have gone up a lot more than they have,” said a producer spokesperson. The January price increase sets “the pattern for the rest of this year”, he added. “We won’t be offering firm prices for any period of time because costs are so dynamic.” Asked when the next increase was likely to be introduced, he responded: “We are probably looking at early second quarter.” A counterpart at another domestic production operation said that his company could be raising its MDF prices again as early as mid-March.

Also citing higher raw material costs as the main reason, one overseas producer who is continuing to export to the UK expects to follow up a price hike of 5% in January with an increase of similar proportions “perhaps no later than March”. He also alluded to a shift in manufacturers’ policy away from targeting market share and towards “reducing production capacity if the price obtained for the MDF does not cover costs”.

European production

There are mills on the Continent “that are closing because they have not got enough wood or enough wood of the right quality”, TTJ was told this week.

A UK-based contact confirmed that his supplier on mainland Europe has been losing “one or two weeks a month” in production terms owing to a lack of raw material. “There is the spectre of going back on to allocation as early as the second quarter if supply remains like this and demand increases,” he said.

Another Continental producer said that his company had been forced to turn down business in the UK during January due to product availability – a situation he expected to continue.

Irrespective of the validity of producers’ cost-based arguments in favour of higher MDF prices, there is always concern when values are hiked by a substantial margin. But as one expert said this week: “People seem prepared to pay whatever the market throws at them. What choice have they got?” Whereas previously buyers of timber products might have been tempted to think “they grow on trees so they should be cheap”, the recent past seems to have ushered in “a mentality change”, he added.

At least one leading distributor expects this latest price hike to be even more difficult to push through to the customer base. “A lot of people filled their boots in the first half of January [in anticipation of the increases] and so it could be another month before the new prices are assimilated by the market,” said a senior spokesperson.

The same contact also expressed concern that some players in the supply chain might be tempted to “give the increase away” in order to win additional volume. A counterpart at another major distribution outfit said there was already evidence of “some people taking the opportunity to grab market share by not putting through the increases”. His insistence on the importance of the sector maintaining “a united front” on passing increases along the chain was echoed by a domestic manufacturer: “Our customers and our customers’ customers have to pass the increase on because it’s not a short-term thing.”

Another panel industry expert said that “the trade prefers the bigger increases” because customers are more aware of them, therefore making them easier to pass on. If buyers know substantial increases are about to be implemented, they might be more inclined to buy “because it becomes an investment decision”. However, a leading distributor believed that buying to beat price increases rather than to satisfy immediate needs can give sales “a false momentum”, potentially leading several weeks later to an unwelcome buying hiatus and a build-up of stocks.

Domestic orders

Domestic order files for MDF have made a reasonable start to 2011, with the weather-related disruption to transport and construction activity in December creating some “overspill” demand that was satisfied in early January. One leading distributor acknowledged that several days of delivery were lost during December but that the daily average volume was “very good” – an indication that the catch-up process was effective.

January is also believed to have benefited from restocking activity in the UK after many buyers destocked ahead of the year-end.

In February, demand appears to have been decent, if unspectacular, and yet inventory levels are dropping and lead times are moving out for some of the domestic producers. Depending on the specification, delivery times are stretching anywhere between seven days and six weeks, with standard sizes said to be more readily available in general than the less mainstream items.

There is only a small volume of MDF trickling into this country given that the UK’s standard board prices are claimed to be anywhere between 5-10% behind those on the Continent and there’s been little change in the pound/euro exchange rate. These imports are limited almost exclusively to “specials” rather than commodity MDF specs.

A UK-based representative of a more distant overseas MDF producer said that the mill’s exports to China are fetching at least 15% more in revenue terms than the UK market is willing to pay. In addition, British customers do not tend to like “the expense and the hassle of container shipments”.

Of course, this price differential and the pound/euro exchange rate have continued to hold open the door to MDF exports from the UK, with several contacts reporting higher-than-normal flows to the near-Continent in particular. According to one domestic producers, his company was able to make a substantial move into the export market during 2010 – a trend which has persisted into early 2011.

Norbord has made a similar point in its latest financial statement, noting that sterling remained in a range last year “that continued to benefit Norbord’s primarily UK-based operations” – as evidenced by a 46% increase in MDF exports to the Continent. European MDF shipment volumes climbed 8% in 2010, it added.

European markets

“European panel markets showed increasing strength throughout 2010 as housing construction activity picked up and repair and remodelling demand remained robust,” it reported. Having pointed to a 30% increase in UK housing starts last year, Norbord said that MDF prices gained 6% during 2010, thereby “reflecting the recovery of higher input costs”.

This year is unlikely to be different in that MDF prices will be driven higher by producer cost considerations more so than by demand.

“I don’t think any of the domestic MDF producers are profiteering. MDF has been an undervalued product,” he said, adding that prices were around 20% higher in 1992 than they are today. The productivity and efficiency gains made over the intervening 19 years will have been more than wiped out by cost escalation, he said.