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“There’s a likelihood that as demand comes off prices will too but today I’m charging exactly the same price as this time last year,” one manufacturer told TTJ in late June. A merchant said that despite the better product availability there was no sign of any price decreases “because no-one can afford to do that”. To what extent inflationary costs impact on business can depend on a company’s purchasing strategies and whether they hedge all or some of their resources. In late June there was a 25% price hike in gas in one day when a Russian pipeline was reduced by 40%; and in Texas, a liquefied natural gas plant, which supplies 20% of the US’s needs, has closed for the rest of the year following an explosion.
But no business will be completely immune from rising fuel and energy costs and there’s a risk that the margin gains made over the past two years will be eroded.
“Inflationary costs are now eating into the better margins we gained during lockdown. The industry has to be careful to keep some of those margins because it makes business worthwhile,” one contact said. “In the last 20 years our industry has been dominated by low prices and people making little money, which leads to lack of investment and there’s a long-term decline if you don’t invest. Prices have to stabilise but their going down is not affordable because costs have gone up.” Manufacturers have the additional burden of higher timber costs. The unprecedented demand during Covid lockdowns consumed a lot of excess timber in Europe and now high electricity and oil prices mean biomass plants are running at full capacity even in the summer and providing competition for fibre. There is, however, some potentially good news for MDF producers: the lower value of the pound could make UK products more competitive against imports; and chemical availability has improved as demand from the fertiliser industry has weakened in line with farmers reducing their use.
Transport costs have increased with the price of diesel but availability has eased to the point it is now a nuisance rather than the headache it was last year. This, however, may be an indication of fewer goods being transported in a slowing economy. As demand settles back to more normal levels, so too are the seasonal MDF market fluctuations which haven’t been obvious for several years. That’s partly down to the extended platinum jubilee bank holiday in June but there is also a feeling that demand will ease over the summer. As for how the market performs during the second half, it was generally agreed it would be flat, but not catastrophic. There is, however, much uncertainty over the continuing impact of the war in Ukraine, the cost of living crisis – which could worsen
if the energy cap is raised again in October, pushing inflation over 11% – and the UK economy as a whole. On July 5 the Bank of England said the economic outlook for the UK had deteriorated and the IMF and OECD have said the UK is more susceptible to recession and persistently high inflation than other Western countries. And at the time of writing this report there was also significant political instability in the UK.
Much of MDF’s fate in the coming months hinges on the housebuilding sector. “The next two to three months will probably be similar to now but I really don’t know,” said a contact. “Sometimes the construction industry and timber industry don’t go the same way as the economy. If housebuilding continues, which is a big motor for us, then we might not see a recession.” Another contact cited the Construction Products Association’s (CPA) quarterly forecast in May that said construction activity was buoyant but there were strong headwinds coming. The CPA revised its predicted growth in construction output from 4.3% earlier in the year to 2.8%. It forecasts that RMI output will fall by 3% this year and housebuilding will grow by 1% – down from the 3% it had predicted three months earlier. The contact did, however, err on the side of optimism.
“I expect demand to be slower through the summer before it strengthens before the end of the year. Perhaps it won’t strengthen until Q1 next year but for the MDF sector there are huge amounts of investment where the product is primarily used,” he said. “We see a slowing in demand generally towards the end of the first half as we have disruption in the market from the cost of living crisis and the war in Ukraine before the fundamentals re-establish themselves.”
His note of caution was that the outlook could change considerably if the cost of living crisis took a dramatic turn but he was hopeful there would be some government safety net. “Governments everywhere are looking at ways to stimulate demand. We’re working on the assumption that there will be some stimulus somewhere that will mitigate the potential impacts and we feel things are still positive,” he said.
A merchant contact was also staying positive, although he predicted a “tough winter” ahead.
“It’s hard to see why it would be anything else other than that, particularly compared with last year. It’s not going to fall off a cliff, but it’s going to dip from where we were,” he said. “We hoped the strong growth might keep going but it’s not a surprise that it’s starting to slow. All the economic factors indicate we are going to have a much harder time.” He was hopeful that inflationary costs would start to level off early next year, but whether operational costs would fall back again was another matter. “At present it’s just one step at a time. It’s very hard to see much further forward than the next few months,” he said. One producer expected to return to allocation in the fourth quarter as the consequences of the war in Ukraine, and the sanctions on products from Russia and Belarus, were felt more keenly.
Another believed the war’s impact on gas supply and prices would be heightened later in the year.
“The closer we get to autumn the hotter the conflict will get on gas. In the summer there’s not much value for Russia to turn down supply but Putin knows that by autumn we need it. If the war carries on, there’s a lot of uncertainty coming,” he said. ■
Above: MDF mouldings sales are still above the levels of 2018 and 2019 PHOTO: SAM MOULDINGS
www.ttjonline.com | July/August 2022 | TTJ
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