Norbord, the UK’s leading manufacturer of engineered wood-based panels, has provided background context which helps explain recent and ongoing price rises which are affecting all primary panel products – particleboard, MDF and OSB.

“Many of our customers are questioning the rationale for current and ongoing price increases in all three primary panel products, and most particularly for MDF and particleboard,” said Dave McElroy, Norbord Europe’s Deputy Managing Director in a recent interview.

“They are rightly concerned, as are we, about the trends that are driving this situation, and they are asking questions about what can be expected going forward. This is an industry dynamic, not just a Norbord perspective,” added McElroy.

“Pricing for panels - like all other commodity-based products - is driven by three basic factors: available supply, market demand and supply chain cost. At this point in time, all three factors are putting a squeeze on the price equation, most particularly for particleboard and MDF. Let me explain further ….

“During the first half of this decade, particularly from 2000 - 2003, the European panel board industry was ravaged by problems with the first two factors, that is to say poor relative demand coupled with huge excesses in supply. Both of these situations are now reversing and I’ll comment on reasons for those changes shortly. But over the past two years, and especially the past six months, we are also now confronted with enormous issues on the third leg, namely massive cost increases. Let’s look at the three factors one at a time.

“On the demand side, growth of European consumption of MDF and particleboard slowed dramatically in the first half of this decade due to two factors: poor performance of Euroland economies and the shifting of a lot of furniture production eastward.

“This situation came at a poor time for the industry, as large increases in capacity were put in place in the very late 90’s and early 00’s. The result was inevitable - average prices for all panel products fell dramatically from 1999 to 2003 – on the order of 30 – 40% across the board for PB, MDF and OSB products. This again brought an industry response – a massive consolidation of the industry over the period, with manufacturers closing down a lot of higher cost capacity, and applying a lot of capital to lower costs in order to compete and continue to supply the trade and consumers in this lower price environment.”

Question: “So, what’s changed now?”

McElroy: “On the demand side, 2006 finally sees confirmation that Euroland economies, particularly Germany, are recovering to more normal growth patterns after lagging most other parts of the world for the past five years. Eastern European and Russian economies continue their rapid growth. Asian and Middle Eastern growth remains strong, and North American economies and housing starts remain at extraordinarily strong levels.

“On the supply side, industry rationalizations over the past five years coupled with the improved world economic situation as above has resulted in supply shortages in various areas. For example, particleboard has been in short supply in Iberia and Eastern Europe for over six months now and there has been a significant price response in those regions. This has now spread across Europe and into the UK. In North America, a Q1 shortage of particleboard has now turned to a Q2 crisis after severe damage to a major Quebec manufacturer, which will remove a significant volume of production for a period of many months. This situation has resulted in emergency shipments of large volumes of particleboard from Europe to North America, creating further pressures on continental European PB supplies.

Question: “What about the third leg – cost?”

McElroy: “There are five clear cost components in the production and distribution of wood-based panels. They are energy, resin, wood, labour and delivery.

• Labour is largely a controllable expense. Norbord, like many other manufacturers, has invested heavily at all four of our European locations in order to maximize productivity and reduce/contain this component.
• Resin prices have increased alarmingly over the past couple of years. Resin products are essentially world commodities linked indirectly to the price of oil (currently at over $70/barrel, over double what it was two years ago). As such, no world producing region is either advantaged or disadvantaged in terms of relative cost.
• Energy has several components. Obviously, natural gas and electricity, but wood is now also linked - I’ll comment on that in a minute.
• Both gas and electricity have increased dramatically in the UK and are on the rapid rise on both the continent and in North America. There has been much about this in the press.
• The gas component alone has pushed up Norbord’s total MDF manufacturing costs by over 20% in the past two years, with shorter term costs peaking at multiples of that number over the past six months.
• Norbord is currently scoping two large capital projects to increase its own electrical generation capacities in response to this continuing threat.
• Wood. Because of developing energy shortages, there is much pressure on wood baskets across Europe as the rapid expansion of co-generation facilities puts increasing pressure on wood supplies across the region. Pressure in terms of both price and absolute availability. Norbord is well positioned for the long term in terms of protecting its future wood supplies.
• Transport. Again, linked to the price of oil, and exacerbated by the European Working Time Directive. Large cost pressures here.

Question: “So, where does this leave us?”

McElroy: “Over the past six – seven years, consumers have become accustomed to an environment of constantly reducing prices and costs. This has been a result of massive investments in cost reduction and productivity improvement and of the squeezing out of much cost in the supply chain.”

“In an environment of worldwide commodity (oil, gas, electricity) price escalation and actual shortages, it is not realistic to expect that prices of products made from these commodities to stay at levels that “appeared” to be the norm by 2003 – 2004. That “norm” was 30 – 40% lower than five years earlier and is well below the cost of production in the new cost environment we are dealing with now and in the future.

“China alone is putting enormous pressure on world resources. Both China and India will continue to expand their economies, putting further pressure on resources.

“Many of our customers are now recognizing this new environment and engaging us in discussions about ensuring the seamless flow of product to them going forward as being their primary concern. But this is a paradigm shift that is not yet obvious to everyone in the supply chain - particularly those who have never been exposed to an environment of tightening supplies and prices.”