If unprecedented was the word most used to describe the Covid pandemic, the one for 2022 could be uncertainty.
The war in Ukraine, rising energy costs, double-digit inflation and the largest drop in real wages for more than 20 years are undoubtedly affecting costs, expenditure and confidence, but the uncertainty is to what extent and for how long – and will these factors worsen.
The UK timber industry is already facing a slower post-lockdown pace and, although the chipboard sector has not experienced the dramatic cost and price movement seen in carcassing timber, it is preparing for a market decline.
“We’re battening down the hatches for a tougher market,” one manufacturer told TTJ. “We are planning for a tougher working environment because costs continue to either be high and not drop, or to accelerate.”
A merchant described looking towards winter as “staring into the abyss”.
On August 26 Ofgem raised the energy price cap, increasing the average household gas and electricity bill by 80% to £3,549 a year. Ofgem said the energy market was too volatile to give projections about the next price cap change in January but warned that prices “could get significantly worse through 2023”.
The merchant said everyone’s “fear of what’s coming around the corner” was reflected in the softening timber market, including chipboard.
And it does seem that with every passing day the forecast is gloomier. In August, financial services group Citi predicted that UK inflation could hit 18% early next year and City traders were expecting the Bank of England to hike interest rates to 4% to combat that high inflation. Around the same time, the price of oil, which had dropped, climbed again to over US$100. Earlier in the month, UK consumer confidence fell to its lowest level since comparable records began 50 years ago. This followed the news that Germany, once the economic powerhouse of Europe, and eastern Europe were likely to go into recession.
The economic picture may be dire but industry contacts were keen to emphasise that although chipboard sales had cooled and the market was facing “significant head winds”, the situation was nowhere near catastrophic.
“If 2008/09 is the disaster zone benchmark, it’s nothing like that,” a merchant told TTJ. He added that his builder customers were generally busy, with some “still stacked out with work”.
“It’s far from dead,” he said.
One manufacturer said his company’s P5 sales were still up on pre-Covid levels, pointing to underlying growth despite the cost of living crisis, while another said that although 2022’s “reasonably robust” demand had dampened in August – the traditional quiet, holiday period – it had not collapsed. The housebuilding market was busy, and sustainable in the long term, he said, ensuring demand for P5 continued. The Covid pandemic had also strengthened demand for traditional houses, which consume larger volumes of chipboard.
A second merchant felt the housing market had cooled a little and RMI and DIY demand for P5 had certainly fallen, but this may be a reflection of the summer holiday season rather than a sustained decline. He actually welcomed the slightly slower P5 market as it provided “a breather” from the hectic sales activity of the past two years, before what he thought would be a spike in activity in September, once people had returned from holidays. After two years of Covid constraints many people had taken holiday in late July and August and the lack of labour resource had contributed to the slowing market.
“I think there will be a flurry of activity once the school term starts and then the market will be back to nearly normal in the second part of Q4 when demand is lower because of fewer working days in December,” he said.
But while the housebuilding sector does have some resilience, and there’s a political appetite for new housing, higher mortgage interest rates and the end of the government’s Help to Buy scheme, introduced in 2013, in March next year will do nothing to boost demand.
The decorative board market, whether chipboard or MDF, is more of a mixed picture than P5. Some sectors still had orders coming in while others were slower, a producer said.
“Overall it’s quieter but it’s not uniform through the market,” he said.
“There are so many sectors that use decorative board – hospitality, retail – that could be affected by the cost of living crisis. I would expect the kitchen and bathroom sectors to be affected but they are still receiving orders,” he said.
Demand for worktops was also stable.
A merchant contact said the value-added “better to best” products were still selling well, suggesting that those with more generous disposable incomes were still spending.
Another producer said the build to rent and apartment markets provided huge opportunity for decorative boards. He believed it may be next year before the effects of falling consumer confidence were apparent in the shopfitting, hotel and restaurant sectors.
During the demand frenzy of the past two years, customers were on allocation from manufacturers. Chipboard mills have now resumed normal service and are focused on ensuring that service continues, said one producer.
“We are trying to plan our way through and talk intensively to customers about their requirements because there are still potential impacts, particularly from the Ukraine conflict, that we have to be aware of,” he said.
The Ukraine war is casting a large shadow but it is still unknown what impact it will have in the UK. In Europe the picture is clearer. A serious shortage of timber is developing across the continent because of the ban on importing timber from Russia and Belarus, while at the same time demand for biomass is rising to counter the reduced supply and higher cost of Russian gas.
“The biomass plants run mainly in winter when gas prices are higher but this summer, across Europe, they’re running at full capacity. They’re using much more timber than they ever have before,” TTJ was told.
Added to this, the extra volume created by Europe’s beetle-infested timber felled in 2015- 16 has now been used.
One producer pointed out Europe’s raw material shortage could be the UK chipboard sector’s gain.
“If there’s no longer a cost advantage in terms of production costs (putting logistics aside) for European manufacturers to export to the UK, we see that as a net positive for the UK market, especially as a lot of our customers are focused on supply chain security,” he said.
Another producer predicted the tight raw material supply could lead to European chipboard mills taking downtime, or being forced to close if Putin switched off gas supplies in the winter.
“Europe has a gas supply problem on top of a price problem. Our industry is energy intensive so it’s one that could be closed,” he said.
The cost of gas is also keeping chemical prices high and there’s a danger that chemical production could become unaffordable in Europe.
Illustrating just how gas prices have rocketed, even in the UK, which sources most of its gas from Norway, a producer said the price had jumped 50% in July to a point 2,000% higher than two years ago.
At present the slower demand means the gas and chemical cost increases are not reflected in product prices and, although chipboard prices have fallen, they are still higher than pre-pandemic levels.
How long these market dynamics will last is another unknown, but one contact was preparing for at least six months of uncertainty.
The Bank of England has warned that the UK economy is likely to go into recession next year but one contact said the chipboard sector would not necessarily follow suit.
“Sometimes our products are convenient products for recession because it’s not that expensive to do a laminate floor, worktop or a piece of furniture,” he said, but added that it all depended on that vital element – consumer confidence.
It is around consumer confidence where so much of the uncertainty hangs.
“Everyone is aware of the cost of living crisis and we have to be aware as an industry that a lot of our turnover is related to consumer confidence and people wanting to invest in their home,” he said.
One contact believed the big DIY retailers, such as B&Q and Wickes, were already experiencing a downturn and their lower share prices reflected the market’s negative expectations.
He suspected the true picture may be revealed in the autumn, “when reality hits”.
“There’s a bit of people knowing it’s getting tough but they’ll deal with it when it comes. A lot of people went on summer holidays, because they haven’t been able to go away for two years, knowing that when they came back they might not have as much money available.”
A producer contact reinforced the pivotal role consumer confidence plays in the market’s dynamics. “Rising costs are challenging but probably the biggest threat we face is consumer confidence. Confidence is the thing that drives the market,” he said.
And that brings us back to uncertainty. Many consumers are feeling unsure, and anxious, about the coming winter and beyond but how that impacts on the chipboard sector remains to be seen.
