The price rebuilding exercise undertaken by domestic MDF producers has continued into the fourth quarter. And further increases are mooted for the near term in response to the apparent robustness of UK demand, tighter global supply, rising raw material and energy costs, and the need among manufacturers to restore a greater measure of financial stability to their MDF production activities. For the medium term at least, the UK MDF sector as a whole appears convinced that prices will remain on a steadily upward trend.
The three main domestic manufacturers introduced their latest price increase in October. Price levels were upped by an average of around 5%, although several contacts alluded to significant market resistance to proposed price increases on some added-value products such as veneered MDF.
As for the immediate future, one producer is considering a further price increase in early December and possibly another for the early part of next year – both of which are projected to be in the region of 5%. Meanwhile, another manufacturer confirmed that “we will be announcing an increase before Christmas”. The third link in the UK production chain was only slightly more conservative, saying that another price increase was targeted for the beginning of next year. “There will definitely be nothing before then because we want to generate some volume before Christmas,” TTJ was told.
This bullishness owes much to the strength of UK market activity over recent weeks and to the emergence of extended lead times; two of the three domestic manufacturers are working on lead times of around three weeks, while the other claimed to be “reasonably relaxed” with a seven-day order file. “October should be one of the busiest months of the year and, generally, we have all achieved that,” said one producer. Going into November, demand from the new housing sector remained “reasonable” while orders for refurbishment projects were flowing “at a fair pace”, he added. Demand for board for flooring has also remained quite strong although prices were described in one quarter as “depressed”.
Overall, UK consumption of MDF appears to be on course to reach 1.15 million or even 1.2 million m3 for 2004 as a whole; this would represent an all-time national record and would be a significant recovery from last year’s total of just above 1 million m3.
Raw material costs
Another shove has been given to MDF prices by rising raw material costs. Galloping oil prices have had a downstream impact on petrochemicals used in MDF manufacture as well as on the petrol required to ship the product to customers. “Had we not had these cost increases, we may now be talking about MDF becoming a profitable product,” said a leading producer spokesperson. “It’s a shame because these MDF price increases would have happened anyway because they have been market driven.”
The same theme was adopted by the other two manufacturers this week. One insisted: “There is still ground to be made up. Prices are still well below what they were a decade ago. Nobody’s getting fat on MDF.” And the other argued that current market conditions constituted “an opportunity for us to get back to financial sustainability” and that producers were still some 20-25% adrift of profitability.
The global tightness of MDF supply has also improved market conditions for the domestic producers. Imported board has not been laying siege to the UK market, partly because manufacturers on the Continent and even further afield have been experiencing strong demand in their home or nearby markets. According to most of the UK agents contacted this week, foreign mills do not have a lot of spare capacity to offer the UK market and are being put off by prices here that are still generally lower than those available in other markets as well as by rising transport costs. Several Continental producer representatives calculate this price differential at around 15%.
Domestic producers may still be worried about losing business to imported board if they increase their prices too much, said one UK-based representative, “but the evidence suggests they could raise them by at least another 5% overnight without affecting the status quo”. He said the differential meant that “a lot of traditional suppliers to the UK are finding it difficult to keep in with their established customers”.
“There is still ground to be made up. Prices are still well below what they were a decade ago. Nobody’s getting fat on MDF” |
According to one industry expert, “the Continent generally sees the MDF market staying this strong well into the middle of next year”.
In similar vein, MDF has continued to come into the UK from South America, although these imports are now generally restricted to more specialised products and to far smaller volumes than was the case earlier in the year. Again, this change has been attributed in part to the growth of MDF demand in South America itself.
Tight supply around the world has resulted in UK producers receiving export enquiries from a wider range of prospective customers. One of the domestic manufacturers confirmed that his company had been “getting enquiries from where we wouldn’t normally expect to get them”, including parts of the Middle East and Far East. “This tends to suggest that the supplier market in, for example, North America and Australasia is also tightening,” he added.
Asian epicentre
The lack of new investment in European MDF production capacity implies that supply tightness could be with us for some time. At present, the epicentre of world capacity expansion is in Asia and China in particular. Measures adopted by the Chinese government to restrain the domestic economy have had some effect but growth figures remain impressive. A Chinese trade association spokesperson addressing a London conference in late October confirmed that the nation’s social fixed asset investment had slowed in the second and third quarters of this year. However, GDP was still 9.5% higher in the first nine months of 2004 and was expected to end the year 9% up on 2003.
Few expect the Chinese economy to grind to a halt in the near future but several MDF contacts admitted to concern over the impact of a major slowdown in the longer term and the possibility that a major surplus of MDF might land on the international market.
The MDF sector is now looking at their strategies in the run-up to Christmas when demand traditionally eases off. “This is the next hurdle we have to get over,” said one contact. “My hope is that the UK producers will not be tempted to hand out too many presents in the next few weeks.”
Other stockists were more concerned about whether supplies would become more critical before Christmas. “It’s never easy to pass on price increases but we are taking more of a firm line on them now because we are not so overflushed with stock,” said one.
These concerns apart, the MDF market place is awash with positive sentiment at the end of a 12-month period which has seen raw board prices jump by an estimated 20-30%. In addition, the market place generally seems to approve of the producers’ ‘drip, drip’ approach of raising prices by only a few percentage points at a time. As one industry expert put it: “The market place had wrongly believed that regular price increases were not sustainable but, as we move more into the awkward winter period, prices are likely to increase still further.”