‘Is the country equipped to absorb such sudden increase in the manufacturing capacity, that too when the real estate sector is undergoing prolonged slowdown’, Harish Rao, Director, Sawdust
MDF manufacturers stare at excess capacity
Today, India's MDF manufacturing capacity at 0.52m CBM is paltry compared to manufacturing capacities elsewhere. World MDF manufacturing capacity is more than 100m CBM of which China alone acocunts for 43%! But what is scaring is the fact that India's MDF manufacturing capacity will double to 1.06m CBM by 2020
Though it is not a kind of material that could change the world, MDF or Medium Density Fiberboard is gaining popularity because of its contribution to sustainable construction. As it is made from the wood wastes, it has become the darling of green proponents. In India too, it is making its presence felt of late, though some are expressing concerns over demand supply mismatch in the short to medium term.
If one goes back to the origin of MDF manufacturing, it all started in 1985 when Mangalam Timber, a BK Birla group company, set up the first unit in the country which was followed by another unit by Nuchem in 1996. However, these two companies could not make much headway in capturing the market dominated by natural wood and plywood. “They failed to create market because of poor marketing strategy,” said the MD of a company who are one of the latest entrants into MDF manufacturing.
Today, India’s MDF manufacturing capacity at 0.52m CBM is paltry compared to manufacturing capacities elsewhere. World MDF manufacturing capacity is more than 100m CBM of which China alone accounts for 43%! But what is scaring is the fact that India’s MDF manufacturing capacity will double to 1.06m CBM by 2020. Greenply is setting up MDF unit in Andhra which is double the size of Centuryply. Rushil Decor is planning to set up MDF plant again in Andhra Pradesh. Balaji Action is also going to start production at its new facility soon.
Now the biggest question is whether the country is equipped to absorb such sudden increase in the manufacturing capacity, that too when the real estate sector is undergoing prolonged slowdown? However, MDF manufacturers are not unduly perturbed by the scenario. According to Greenply capacity is created not keeping in view the demand scenario in next 1-2 years but expected demand in the long term. According to them new capacities will take time to settle down (meaning break even and make profit) initially but in the next 3-4 years the situation will improve substantially. Though Greenply is expected to commission its new plant in Andhra by July 2019, it expects fully capacity utilisation to happen only in Financial Year 2022.
Further, high capital cost involved (to set up MDF unit with 200,000 CBM capacity capital investment of Rs 500 crore required) acts as entry barrier for many. Therefore, there are no players manufacturing MDF in unorganised sector.
What is attracting the manufacturers to this segment is the worldwide trend in consumption of panel boards. Globally, the MDF:plywood consumption ratio is 65:35, whereas in India this ratio is skewed in favour of plywood of 6:94. So, from this level, demand for MDF should only grow, may be at the expense of other products.
One of the advantages of MDF is its cost. Its price is almost 50% discount to premium plywood products with not much difference in the performance.
However, many people in the panel industry say, MDF has not been able to create its own market. Today, MDF market size is around Rs 1,600 crore which is created by eating into the market share low grade plywood. In other words, plywood’s loss is MDF’s gain. Consumers who want branded products but cannot afford premium plywood, find MDF is the best alternative.
Another threat for domestic MDF manufacturers is from imports, mainly from China. At present, imports account for nearly 30% of the demand. Since, MDF is a bulky item its transportation involves considerable cost. So imported products find ready market in the South which accounts for nearly 45% of the all India market. Most of the Indian MDF manufacturing units are located in the Northern part of the country and transporting them to Southern market make them economically unviable option. Average sale value of MDF is around Rs 24000-25000/CBM whereas imported MDF costs around Rs 18,000/CBM. No wonder, then leading MDF manufacturers like Greenply and Rushil rushing to South to set up manufacturing units.
Further, setting up manufacturing units in South has also the advantage of proximity to seaports for export purposes. At present, India’s exports of MDF is negligible as the price realisation in domestic market is lucrative. This is also partly due to the fact that in case of exports only plain MDF is sold whereas in domestic market there is demand for laminated MDF where price realisation is higher. Manufacturers who are planning to set up units in the South are planning to divert part of the production initially to international market, till the domestic demand picks up to match the supply. Also, exports will help the manufacturers to insulate themselves from sudden disruption in the market on domestic front as it had happened when the government had demonetised currencies.
Also, MDF manufacturers expect some disruption happening when the E-Way Bill system is introduced in the country from 1st April. Once the E-Way Bill system is introduced manufacturers in the unorganised sector may find the going tougher. MDF manufacturers are eyeing this segment which they feel eventually shift to MDF.
All said and done, next 2-3 years are crucial for the industry and there is likelihood of price war by the new entrants to capture the market. For example, Century is pricing its MDF 3-3.5% discount to that of Greenply. This trend is likely to become more intense in the next few years.