BIS Shrapnel senior manager- Bernie Neufeld

Leading forest industry analyst BIS Shrapnel estimates that worldwide production of medium density fibreboard (MDF) exceeded 47m cubic metres in 2006 and forecasts annual production will surpass 52m cubic metres by 2011.

MDF production is projected to increase at a rate of two to 3% per annum, based on current capacity expansion plans, with the dominant producing region anticipated to be north Asia (mainly China), according to BIS Shrapnel's Medium Density Fibreboard in the Pacific Rim and Europe, 2007 to 2011 report.

North Asia has expanded its MDF production capacity more rapidly than any other region in recent years, though only has plans at this point to construct three further facilities during the next five years which will help produce a total of 21m cubic metres per annum in the region, according to BIS Shrapnel.

Europe is expected to be the fastest growing producer this decade as there are plans for eight new plants for this region and BIS Shrapnel expects this region will reach production output of 17.7m cubic metres by 2011.

"MDF plants in most regions are operating close to capacity and the small number of new plants planned for construction over the next couple of years suggests capacity utilisation rates will rise to very high levels, unless additional plants not yet announced come on stream during the next five years. This tightness is expected to be particularly evident in China," said report author and BIS Shrapnel senior manager, Bernie Neufeld.

BIS Shrapnel estimates consumption was more than 44m cubic meters in 2006 and forecasts it will exceed 55m cubic metres by 2010, out-pacing anticipated production.

Consumption will be strong in China, according to BIS Shrapnel, and will account for around 45 per cent of world-wide demand for MDF by 2011. Europe will also show strong growth in demand for MDF products, while South America will also grow rapidly during the next five years.

During the 1990s and 2000s, the industry underwent a significant expansion in capacity, and in many regions, this led to low prices and poor profitability.

"In recent years, the industry has been far more rational in its investment decisions, with total new capacity expected to amount to 5.9 million cubic metres between 2007 and 2011. However, we do expect there will be further announcements of new facilities during the next few years as it becomes evident supply is not meeting demand," explained Neufeld.

Prices have recovered significantly in all regions as construction of new facilities has slowed and demand has risen following the fall-out from the 1990s Asian financial crisis and the oversupply experienced in the early 2000s, according to BIS Shrapnel.

"Prices have been driven by cost increases and a more balanced supply/demand scenario in most regions. We would expect upward pressure on prices during the next five years, particularly from 2008 onwards, as environmental standards increase the cost of resins and demand escalates," said Neufeld.

While there will be relatively strong and sustained growth in several economies over the next five years which will help increase demand for MDF products, a major concern is the potential for a slowdown and possibly a recession in the United States and the impact this would likely have on the world economy, according to Neufeld.

However, the economic outlook for China is significantly more positive. BIS Shrapnel forecasts Chinese GDP to grow by eight to 10% per annum out to 2011 and expects this country will be a key driver of world economic growth and demand for MDF.

Imports to Japan and South Korea are in large part supplied by overseas plants owned by Japanese companies such as Sumitomo and South Korean companies such as Dong Wha, said Neufeld.

The plants are strategically located in south-east Asia and Australasia in proximity to the home market. This has created a highly competitive import market that is difficult for other companies to penetrate.

Imports to the United States are supplied mainly by Canadian, European and South American-based companies.

"European and South American companies tend to supply specialty products such as laminate flooring and mouldings, which are still finding further demand and will be less severely impacted by any downturn in the housing sector in the United States," said Neufeld.

However, BIS Shrapnel believes the establishment of production facilities by European-based Kronotex and Kronospan in the United States in the next five years will likely create a much more competitive market.

BIS Shrapnel believes China is at a crossroads. "China has built-up a huge production capacity, however, it has a limited domestic supply of raw material and is highly dependent on logs imported from Russia," said Neufeld.

"As a result we expect there will be significant constraints on further capacity expansion in China, which suggests that a large amount of MDF will need to be sourced from imports during the next five years.

"Much of this may ultimately come from Russia, which will only be possible if Russia adds to production capacity in the next couple of years. In the interim, there may be opportunities for producers from other regions to supply any shortages that may develop in China."

Environmental concerns continue to impact the forestry products industry, with the introduction of legislation and rating systems in many regions, as well as demands from consumers for more environmentally friendly products.

"While products, such as those with low formaldehyde emissions, are more expensive to produce, they are also well-received by consumers who increasingly exclude products which do not meet environmental standards," states Neufeld.

BIS Shrapnel believes the MDF industry has significant long-term potential growth and advises forestry producers should focus on the long-term outlook for demand when planning the expansion of facilities and work to identify new regions for development.

"India, Pakistan and the Middle East have the potential to be significant markets for MDF producers. Strong growth in key end-use sectors, housing construction and furniture manufacturing in north Asia, eastern Europe and Russia, are expected to counteract the slowdown in housing construction and the restructuring of the furniture manufacturing industry in the United States in the short-term," said Neufeld.

Composite panels such as MDF are reaching a more mature stage of the product life cycle, and this will lower short-term profits during downturns in demand, according to BIS Shrapnel.

"Players that are able to geographically diversify their operations to cushion against individual market downturns have the opportunity to reap very healthy returns," concluded Neufeld.

Source: www.infolink.com.au

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