Riding the crest of a slump – But still standing

2009 will be known as the year when the dire economic conditions finally caught up with capacity development in the MDF industry.

Hitherto, the industry in North America and Europe had dealt with the slump in demand by short-time working and mill closures, which in several instances became extended closures, but technically these mills could be considered still to be on the capacity list.
However, 2008 and early 2009 saw dire operating conditions for the industry, but a set of factors combined to create the ‘perfect storm’: Hard-pressed customers reduced stocks and demand and many were financially stressed, becoming a concern for their suppliers. Over-capacity existed which, together with weak demand, restricted the opportunity to raise prices.
Through various forces, the principle cost elements were rising and these included wood, resins, energy and transport. In many instances these cost rises were quite sharp. Furthermore, the US dollar strengthened, encouraging imports from the new mills in South America and Asia and inhibiting US exports.
As mentioned last year, these articles deal with capacity development rather than the short-term  interplay of production, supply and demand. Therefore it is quite feasible that capacity changes in any single year, or short run of years, can run counter to the market trends and conditions. However, this current crisis has been so prolonged that there has been time for the market conditions, and operators’ views of future trends, to have combined to impact directly on physical capacity.
The aggregate capacity for North America and Europe exhibits a 1% reduction at the end of 2009 compared with end-2008 and was 23,524,000m3. Readers may recall that at this time last year the forecast was an increase to around 25,575,000m3. This significant difference was brought about by delays/postponements in several eastern European/Russian projects past the end of 2009 and a number temporary  closures in US mills which were included in the 2009 listings, but which have subsequently been declared permanent. Only four new lines came on stream, as opposed to an estimated six, and there were six closures compared with an expected three.
The 2010 survey provides listings of existing capacity for MDF worldwide, as at the end of 2009. Furthermore, drawing upon a range of sources, including the industry itself, it is hoped to show the changes expected to capacity during 2010 and 2011 and beyond.
The survey is again published in two parts, with this section dealing with North  America and Europe. The second will deal with the ‘Rest of the World’ and will be published in the August/September issue.
The author and the editor of WBPI remain grateful to all those organisations that took the time to complete our online enquiry form and to all those other indus- try professionals, such as panel equipment suppliers, trade associations and trade jour- nals, who made valued contributions  to the narrative. We are happy to receive all new information regarding capacity changes at any time during the year. As a reminder to those considering contributing  to part two of our survey, or the upcoming particleboard survey, you may make your submission at www.intermark.plus.net where you will find the necessary forms.
European Capacity
As might be expected from our earlier comments, European  capacity did not pass 20 million m3 during 2009. At the end of 2008, capacity stood at 18,426,000m3  – 65,000m3 greater than published last year (because information from Greece uplifted the Alpha mill capacity and this has been shown for both years in order not to create the impression that this was new capacity in 2009). The total capacity at the end of 2009 is calculated to have been 19,051,000m3, which represents growth of 3.3% – less than half that of 2008.
The net changes are brought about by the three mill closures mentioned last year and eliminated from the lists in the follow- ing pages. These were: one line at Glunz in Meppen, Germany; Sonae’s Isoroy mill at St Dizier, France; and Homanit at Herzberg, Germany.  These represent a total of 415,000m3. There continued to be short-time working and extended closures at various locations which will have influenced effective capacity.
The new mills coming on stream were all in eastern Europe or Turkey and included: Starwood at Bursa, Turkey (495,000m3); Yildiz Entegre at Kocaeli, Turkey (300,000m3); and the extension at Kastamonu Gebze, lengthening the press by 14m and raising capacity by 45,000m3. Thus Kastamonu becomes about the 10th largest producer in the world (by standing capacity) and is set to grow larger; it is about the sixth largest producer in Europe.
The fourth new mill was Kronospan’s at Strzelce in Poland. Kronospan remains the world’s largest panel producer – and seemingly the most active in terms of new projects of all panel types.
There was no capacity creep recorded this year in western Europe, even though from the middle of 2009 mills in ‘mittel’ Europe reported improvements in their sales. At the same time it was evident that several of the larger groups – especially those with interests in that same region – were struggling with their finances. There has been quite extensive reorganising  of corporate  structures with a view perhaps to attract new investment or to sell off parts of their businesses.
The Brunflo mill in Sweden is in administration, but it has been left in the lists as no information exists as to whether the final outcome will be sale or closure.
Future Changes in Europe
It is very likely that total European capacity will increase in 2010 by 1,360,000m3  over 2009, or 7.1%. We are not factoring in any permanent mill closures in 2010 but cannot rule them out, especially in western or southern Europe. Table 1 provides a listing of all the changes for 2010 and 2011.
The five delayed Russian plants are shown, but given the market situation of 30-40% reduction in domestic demand, and uncertainties over local contracting and finance, there is always the possibility of further delays. There is a further plant of interest being installed in Belarus for OAO Borisovdrev by the equipment supplier Binos.
For 2011, capacity development looks very familiar. There are at least five new mills which have been announced, but some represent slippage from 2010. It is believed one or two could be postponed, depending on market circumstances.  Referring again to Table 1, all mills are in eastern Europe/Turkey. Kronospan will build the first modern plant in Ukraine and Swedspan is beginning what looks like a realignment  of its resources, following its own restructuring by Ikea, and will build a thin board line in Poland.
These thin boards are being used in an updated version of a furniture fabrication  process which has its origins over 120 years ago. This author remembers seeing Italian  wardrobes (only 30 years ago!), two metres wide and with side panels at least 50mm thick, seemingly made from solid walnut but which could be moved by one person. They were made from a light wooden frame with a veneered plywood skin and solid lippings. The system found favour in Scandinavia, for kitchen and living/dining furniture certainly, in the 1950’s. However, the manufacturers used wet-process hardboard for the skins. Ikea has favoured this process for at least the last 15 years to reduce the weight of its carry-away furniture.
The story with most interest is that of Kastamonu, which has three MDF mills planned for 2011 and perhaps beyond. Its announced Russian plant has been put back but Kastamonu plans another mill in Turkey – and to develop in Romania.
The aggregate capacity of these mills is at least 1,370,000m3  – the capacities of the Romanian and Polish mill have been esti- mated – and represents growth of 6.7% over 2011.
Table 2 summarises the impact of this new capacity in the various regions in Europe in 2008-2011.
Most striking is the decline in capacity in the original EU15 countries, which reduces their share of the market from 74% to 51.1%. The other countries of the EU, principally Poland and Romania, contribute around 600,000m3 of additional capacity and improve their share from 11.8% to 12.8%. Note that even with this, the EU share still declines overall. The major gains are to be found in Russia and Turkey. Between them, their share rises from about a quarter toa third and gains some 2.8 mil- lion m3.
Aggregate European  capacity does not pass 20 million m3  until some time in 2010.
North American Capacity
Firstly, it is necessary to explain the recorded fall in North  American capacity during 2009, which amounted to a 16.2% decline – the second year running that MDF  capacity fell. 2008 saw three mill closures, namely Holly Hill, Uniboard, La Baie and Great Lakes, Lackawanna. These are now miss- ing from the 2009 listings.
Also missing in 2009 are Bassett Furniture, Norbord Deposit, and Paragon  Panels, Eufala. CMI Craftmaster has also been removed because the CPA has listed the company in its hardboard category.
Sierra Pine, Rocklin has also closed one of its lines at the California  mill – incidentally, the first live MDF  mill this author  saw. Some of the output of the huge 20 opening press was, even at that time, being converted into added-value products.
One bright spot for the region was the opening of the Industrias Emman, Mexico, line from SWPM, but only for 35,000m3.
Therefore, a net 588,000m3  has been lost, which means about 1.3 million m3 net since the end of 2007. North America now has just 21 mills, which is sad progress since their dynamic beginning and the 12 mills running in 1980 in the US alone.
Last year it was commented that North  American mills were responding to the market conditions rather more quickly than those in Europe. In fact, these recent closures suggest the American response is rather more brutal. Over recent years there have been several instances of this type of response, with LP withdrawing from composite panel production (followed by closure of much of its OSB capacity) and the sale by Weyerhaeuser of its particleboard and MDF  mills to Willamette  and its subsequent sale to Flakeboard and others.
The industry has had to deal with adverse market conditions but equally, over a number of years, the pressures on formaldehyde content, VOC emissions and the like, which involved additional expenditure for no cost savings or capacity improvement. Obtaining permits for new mills has not been easy and, more recently, operators  faced raw material availability problems and competition  from biofuel and biomass uses – significantly subsidised.
Future changes in North America As shown, the major event of 2010 will be the delayed opening of the Uniboard mill at Moncure, which is the transfer from its La Baie operation. Total capacity will be raised by 400,000m3, or 8.9%, but will still be below 2008 levels. It has been rumoured  that ACT could reopen its Pembroke mill “provided market condi- tions are favourable”.
There has to be some doubt that these conditions will be met, or at least in sufficient strength to trigger the reopening. The survey of North American mills saw none of them suggesting they would be modifying capacity (capacity creep) to meet improved conditions. Please see the Business Barometer results, which indicate a (hopeful?) increase in production of about 9% in 2011 over 2009.
The survey’s cautious view of American housing starts last year has been echoed by the National Association of House Builders, which, in response to new housing permits rising 7.5% commented, “no sustainable recovery is recognisable”. The permits grew from an annualised rate of 637,000 units to 685,000 units. Remember  though that housing starts were around two million units at the end of 2006, just as the market crashed. There seems to be a huge amount of slack to be taken up if the panel industry and forest products industry in general is to achieve a respectable recovery.
Non  Standard Production
The desire to add value to output probably to help offset the lower volume sales remains very evident in North  America and Europe. In North America, compared  with last year’s survey, there has been a jump in the 2009 position and a gradual rise to 2011. Europe also has seen an apparent uplift for 2009 if this year’s results are com- pared with last. 
Europe remains ahead of North America in the proportion  which is non-standard production. North  America has, almost by necessity, had to concentrate  on low-formaldehyde boards and there is ongoing interest in lower density panels. However, this is not a homogeneous view because there is wide divergence in the proportions  among mills.
Some are already operating at over 50% non-standard, others at less than 5%. Europe has been a leader in product development and creating wider applica- tions by varying product specifications. Presently of course it is debatable  if the term ‘non-standard’ is applicable to mills dedicated to laminate flooring substrate or very thin board. For these mills their production is ‘standard’ – at least to them.
The acknowledged leader in diversifying product range, Medite, announced in 2010 its intention to produce acetylated-fibre MDF  under licence from Tricoya. Acetylation is the most advanced form of wood modification and this will be its first use in a panel product. Those who carried out the early research claimed that it was possible to re-impregnate the acetylated fibres with other chemicals to create even more enhanced characteristics. The addition of polymers would create a plastic substitute, using less-expensive polymer. Metal oxides could create hitherto unthought-of products. In Medite’s case it probably has high dimensional stability, rot-proof, exterior applications in mind, but if produced in thicker panels could be cut to window and door frame material.
Why acetylation? some may ask. Heat modification is the most common process with solid wood. However, experiments with panels have shown what all plant managers know very well: that dry fibres and heat do not mix very well!
Business Barometer
It has been hard to separate reality from optimism in this survey’s results. Therefore Table 6 shows the 2009 index as both ‘100’ and the position as reported last year; the barometer shows trends rather than statistical precision. The 2010 and 2011 changes are forecasts at the time they were made by our respondents and this is how a degree of optimism might creep into the results.
In Europe, the production trend seems to be fairly strong using a base of 100, but using last year’s estimate, production in 2011 may only be at 2009 levels.
Prices appear to suffer a significant decline in 2010 and a marginal improvement in 2011. This is despite the price increases which it is known many mills are trying to achieve. This part of the barometer could be suspect. There is agreement that costs are rising, especially in 2010, although they appear to flatten out in 2011. If the barometer is reliable, manufacturers expect a further squeeze on their margins.
In North  America, there is an expectation of improved production levels in 2010 – to as much as 6% above 2009 levels. By 2011, production will be about 9% higher. North  American mills are expecting to be able to achieve price increase, perhaps on the back of the reduced capacity.
Theoretically,  the producers expect a cost reduction in 2010 (based on our 2009 survey), which does seem unlikely. North  American producers are under similar cost pressures to their European  counterparts.
What is really being shown is uncertainty. Established  producers can benefit only from a healthy increase in demand, but how that demand will be created is elusive.
Even if the central European countries are enjoying an upturn,  they face competition from southern and eastern European  mills, which are making strenuous efforts to maintain production.
This author is somewhat concerned at the potential for some near-crisis in one or two other countries after the Greek bailout, which could even include the UK if its new coalition government  falls short of the expectations of the financial markets. The alternative  is austerity, which is also not an ideal condition for panel markets.
How the Listing was Compiled The WBPI listings from 2009 were reviewed and modifications made using other published sources and data received directly from the mills. Published information was reviewed for news of capacity changes. These sources included relevant trade magazines, association reports and equipment suppliers’ reference lists.
Self-completion enquiry forms were distributed to the mills requesting current and future capacity data. These forms contained the information the mills provided the previous year. Other questions were asked about non-standard production,  future production rates, price movements and cost changes. The form was also posted on a special website.
The mills’ own reported capacities are used wherever possible because this is the basis on which they make their estimates of future capacity and production changes. Where this information is not available, published sources are used, usually on the basis of 330 operating days per year.
Conversion of ft7 to m3/year is made with 1,000ft7 equal to 1.77m3.