Summary
• MDF prices have fallen and distributors have cut their margins.
• Some contacts say the temporary, or permanent, closure of lines is needed.
• The strain is being felt particularly at the commodity end of the market.
• Prices for other forms of MDF have held up better.
• The euro/pound exchange rate means some UK manufacturers have looked at exporting to Europe.

More regular periods of downtime taken by both domestic and EU producers have failed to prevent price weakness from afflicting key elements of the MDF trade, although at least one of the leading home manufacturers believes prices “must now have bottomed out”.

In effect, customer confidence – or the acute lack of it – has become one of the biggest factors affecting sales of all forms of panel product. “Why would anybody have any confidence when some of our biggest financial institutions have been proved not to be safe?” was a question being asked.

Feedback from some players in the MDF production sector indicates that distributors “have been working on much lower margins” in their bid to remain ahead of the competition. This is giving the impression, said one producer, that “prices have fallen much further than they have in reality”.

Other operators along the MDF chain accepted that distributors’ margins have been pared back but say that they have been “forced to react to the conditions set by the producers”. This week, several were urging producers to stand firm on price and maintain the hard-won value of the product. And some were even calling on manufacturers to increase their prices and to “put the phone down” on customers looking to undercut the going rate.

In the same context, a domestic MDF manufacturer said: “When you look at where our costs are going, we need to see prices going up.” But the practicalities of achieving this in the current market conditions are far from simple, he added.

Rising raw material costs

As indicated above, the problems facing domestic MDF producers have been rendered all the more intractable by steeply rising costs. According to one, his bill for resins has jumped “double figures” in percentage terms between the third and fourth quarters, while reports of energy contract renewals resulting in cost increases of 30% are by no means uncommon.

Against this background, one of the leading domestic producers said that downtime had become “a greater feature now than at any other time in the company’s history”. And he added: “Options are still being employed to try to balance it [the market] but this is not doing anything as far as prices are concerned.” Another domestic producer said that downtime would “remain integral to the company’s plans” until business conditions improved.

Call for drastic action

However, several MDF contacts said that more drastic remedies – such as the temporary or even permanent closure of lines – may be required to help the industry through its current poor state of health. “There are between eight and 12 lines too many in western Europe at the moment,” said a UK-based agent for a Continental producer. Having recommended the implementation of prolonged periods of downtime or even the “long-term mothballing” of lines, he said: “There will be consequences – and even casualties – if producers don’t act.”

Structural developments within the MDF sector have exacerbated the problems being experienced in the UK and Continental Europe, he continued. In the past when capacity was being added in western Europe, other regions of the world such as eastern Europe and South-east Asia had offered potential outlets for this additional production; however, these regions have since developed capacity of their own and are thus less dependent on imports.

Also adopting a Europe-wide perspective, another source said that removal of capacity from the market place was looming ever larger as an option. “Something will have to go – these pieces of kit are too big to be sitting around doing nothing,” he said. His view was echoed in producer circles, with one senior figure saying: “This difficult market will have an effect and the weak will go.”

Commodity end hit hardest

In line with other panel products, the strain on producers is proving to be particularly acute at the commodity end of the MDF product range. “It’s here we are experiencing the greatest problems in terms of price and our ability to make a margin,” TTJ was told.

With the newbuild housing market at its lowest ebb, sales of standard board have been particularly difficult. Widely used for skirtings and architraves, the price of MR MDF has also come under significant pressure while MDF consumption for laminate flooring has reportedly slumped. “Demand in general from the building sector has been a disaster,” said one MDF producer. “Business has been decimated.”

Meanwhile, prices for other ‘special’ forms of MDF – such as FR – have been comparatively resilient. Facing weak demand, suppliers of veneered MDF are paying less for raw MDF but have witnessed no softening of their veneer costs.

Even outside of the building sector, there is growing evidence of consumers reining in their purchases to match only their immediate needs. “It’s all hand to mouth out there – customers are only buying against orders,” said a supplier of veneered MDF into the furniture and shopfitting sectors. “It has meant dropping our prices,” he added, “because if we don’t, someone else will.” In this context, shopfitters are reporting that a number of their leading customers have shelved projects.

No joy from export channel

The export channel is offering little respite for domestic MDF producers, not least because downtime is already being taken in many of the overseas markets they might choose to target. “The euro/pound exchange rate led us to look at export opportunities but it’s a very competitive market on the Continent,” said a manufacturer. Some business has been conducted with India and the Middle East in recent times, although prices are described as unattractively low in many instances. Furthermore, building activity in the latter has been punctured in the last few weeks by the celebration of Ramadan.

At the same time, board has continued to trickle into the UK – mostly from familiar sources on the near-Continent given that transport costs are effectively ruling out longer-haul business. The pace of imports from mainland Europe is far slower than that established earlier in the year and is not seen as a major factor in the decline of the domestic MDF market. One of the trio of home manufacturers said: “We have not seen as many Continental producers knocking on the door because of higher transportation costs and currency movements – most of my competition is from the domestic producers.” And the flow of MDF entering the UK “may yet slow a little”, he added.

This view is shared by a senior industry player who is limiting his MDF activities to “servicing existing accounts on the back of orders for other products”. He said of the Continental board suppliers still shipping to the UK: “I don’t know how they do it. In effect, their motivation is to maintain a presence in the UK and perhaps to move volume that is proving difficult to shift in markets nearer to home.”

Pent-up demand

The search for positives in the current business climate is becoming ever more difficult although several contacts pointed out that, given the UK’s fundamental need for more homes, the current economic crisis creating a pent-up demand that will be released at some point in the future. Furthermore, the London Olympics is a factor likely to provide some relief in the medium term, contacts said. And one self-confessed optimist contended that stagnation in the building sector might ultimately encourage homeowners to invest in their existing houses. “There is a glimmer of light out there for those with a strong pair of binoculars,” he said.

And to end on perhaps the most positive note of all, TTJ was assured this week that the MDF industry is currently blighted by “a market issue and not a product issue”. The same contact added: “The integrity of the product will guarantee its future.”