Summary
• MDF prices rose in the first quarter and are likely to rise again.
• Stocks are low throughout the supply pipeline.
• Timber costs have risen and there is competition from the biomass sector.
• Higher fuel costs have caused hauliers to increase their prices.
• The earthquake in Chile has impacted on international supply.
• Sterling’s weakness is opening up export opportunities for UK producers.

MDF is helping to lead wood-based products from under the recessionary cloud that has hovered over the markets from late 2008, according to one manufacturer.

Higher levels of both activity and confidence are reported among a number of key consuming sectors, with the result that MDF production is now “rattling along” at substantially higher capacity utilisation rates. Joiners and shopfitters are understood to have upped their orders significantly, while retailer promotions are said to have provided a boost to kitchen equipment sales. However, MDF sales into the construction sector have improved only slightly, if at all, in recent weeks.

As a result of this generally brighter demand picture, and with cost pressures continuing to mount, MDF producers had no hesitation in pushing up their prices once again towards the end of the first quarter, most notably on standard board and MR. And they are now alerting the market to the strong possibility of implementing further increases prior to the start of the summer holiday season.

While some producers preferred not to commit to a precise timescale for the next increase, one senior spokesperson said that he was considering upping his prices in the UK by an average of around 5% with effect from the beginning of May after having announced increases of a similar scale on certain products during the latter part of the first quarter. Another producer expects to be adding a 7-10% hike in June to the combined 15-20% increase achieved in two separate pricing rounds during the first quarter. And another company which has raised its UK prices by an average of 12% since October last year is scheduling a further upward move of 4-5% “before the summer”.

Rises accepted

Elsewhere, a leading producer acknowledged that two first quarter price hikes by his own firm had become quickly established in the market; there was distinct “potential for further price increases” and the possibility that “this could happen quickly” – and probably “before the summer”, he added. This assessment won support from a leading UK distributor who said that increases take between four and six weeks to become assimilated into the market and that, as a result, the next rise should be established well before the holiday months of the summer when trading traditionally slows.

Price progress would appear to be justified when taking into account the longer lead times – up to three or four weeks, in some instances – that are on offer from some MDF producers. Stocks are understood to be quite low throughout the supply pipeline, partly because of uncertainty surrounding the sustainability of demand and partly because recession has prompted many buyers to “look far more seriously at stock management than ever in the past”, according to a leading distributor. “People are taking a very harsh look at the stock range and stock turn.”

Lower inventories

The trend towards some distributors and end users running with significantly lower inventories compared to past years prompted a senior producer spokesperson to comment: “People have to start reintroducing volume to the supply chain – they can’t expect the stocks to be carried wholly by producers.” As several MDF manufacturers told TTJ this week, producers have learned lessons from the past and are not prepared to build stocks which bear no relationship to existing levels of demand.

Meanwhile, distributors and other MDF sellers praised producers for their clear attempts to tailor production to actual order levels. If they persist with this approach into the summer, said one, there will be a welcome avoidance of a return to the summer “silly seasons” of the past when the market continued to be “inundated” with supply at a time of significantly reduced demand, often resulting in a downward prices Producers are now “prepared to stop the mills and to take time out” rather than “produce volumes that can’t be sold at a reasonable price”, TTJ?was told. “Manufacturers have a huge investment and they are not getting what they need from it.”

All the major market players seem to be agreed on the need to maintain upward price progress in order to restore lost value to MDF. While stressing that they remain mindful of the ability, or otherwise, of their regular customers to pay these ever-higher prices, producers go on to insist that the recent hikes have failed to keep pace with their rising production costs.

Timber costs

One domestic MDF producer highlighted an increase “of more than 30%” in his timber costs within the last half-year, driven to a significant extent by the strength of competition from the biomass sector. The heat in the timber market has been further fuelled by the difficult weather which struck key parts of the UK at the end of the first quarter and impacted on logging activity and vehicle movements. MDF producers described wood supply variously as “a bit fraught”, with “continuing worries over availability at the right price”. TTJ was told: “There seems to be recognition throughout the market now that wood will be at a premium in the coming months.”

MDF producers also emphasised the increased cost of chemicals. “A lot of our raw materials are denominated in US dollars and so we are feeling the effects of all this,” said one domestic manufacturer. “The increases we have had [on MDF] have not fully offset these extra costs – I had a better margin six months ago.”

Higher fuel costs have also resulted in hauliers bidding to push up the prices charged to clients in the MDF sector. Furthermore, several MDF contacts reported difficulties in obtaining haulage to certain areas because of a reduction in services and also haulage company closures.

One producer spokesperson agreed that “bits and pieces” of price increases over recent months had failed to compensate for a heavier cost burden. Traditionally, he said, double-digit percentage price hikes have not been a feature of the UK market but moves of this scale could not be ruled out in the longer term if production costs continue to escalate and global supply continues to tighten. And he said: “I think that supply is going to be a big, key issue this year.”

Chilean supply

Adopting the wider perspective, MDF producers pointed to early signs that an improving international market is leading to a tightening of global supply. Chile is prominent in the MDF mouldings market in particular, and production lost as the result of the earthquake has left holes in the international MDF supply pipeline, further helping prices to firm. “We are getting enquiries from all over the world,” said a producer.

Another was more specific in that he identified consumers in the Mediterranean region as particularly eager prospective buyers; as producers elsewhere in Europe become busier, he explained, they are focusing sales of their limited production volumes on markets both at home and abroad, which offer higher returns. Mediterranean countries generally pay lower prices for their MDF and so when supply becomes constrained, “these are the first to be cut”, he said.

The ongoing weakness of the pound against the euro continues to open up export opportunities for sterling-based producers. “I’m looking more into export because we are back in full production,” a domestic producer said.

Exchange rates and generally tight supply in markets closer to home also help to explain a further reduction in MDF imports in the UK. Even some of the UK’s traditional overseas suppliers appear to be committing smaller volumes to this market than would otherwise be the case, partly because of improved demand nearer to home that can be satisfied without incurring rising freight costs.