If you think that recent fall in MDF price is a temporary phenomenon caused by some newcomers trying to penetrate the market and gain market share and the prices are likely to stabilize soon, you may be proven wrong as the analysis of likely capacity to be added in the coming years gives not too rosy picture for the industry in the near to medium term. A few years ago it was considered to be sunrise industry but too many players jumping into fray too quickly might have spoiled the game, at least for the time being.
Century Ply’s 600 CBM/day had gone on stream last year in October and the company was able to achieve break even in jus six months. Encouraged by these results, the company drew up its expansion plans in April and announced that the capacity would be expanded from 600 CBM/day to 1000 CBM/day. Then, for the company it had made economic sense as by just investing another Rs 110-120 crore, the company could add another 60% capacity to the existing plant. However, within four months, the company changed its plans and announced that expansion plans were kept on hold. These chain of events explain the situation prevailing in the MDF industry.
Price war started with Action Group which has set up MDF manufacturing plant in North India announcing aggressive price cuts of 6% in thick MDF and 9% in thin MDF prices in April 2018. This affected the expectation of the MDF dealers who anticipated similar action by other manufacturers too and started holding lesser stock. Their expectation finally came true when Century Plyboards and Greenply Industries finally followed suit with price cuts of 6-8% across their MDF range of products. In fact, Greenply Industries is considered to be trend setter in the industry and its products always command premium over its competitors. And when leader too cut the price, it was evident that all is not well in the industry.
This war doesn’t seem to be one-off event and is expected to continue and intensify in the coming months as more and more new capacities are lined up. In last nine months 4,25,000 CBM capacity has been added in North India by Century Ply and Action Group which is an addition of nearly 70% of the then existing capacity. Definitely Indian MDF market is not so matured to absorb such huge quantity in a short span of time. Over capacity and price crash are likely to be the outcome.
In FY18, the size of MDF market was around Rs 2,000 crore in value terms and around 0.9 million CBM in terms of volume. In other words, in the last financial year demand almost equaled the supply thus helping the price to remain stable. However, the situation has changed dramatically in the new financial year with the new capacities of Greenply in South India and Action Group in North India recently going on stream. Further new capacity addition expected during current fiscal itself with many medium sized capacities coming up. As a result, installed capacity is expected to touch 1.7 million CBM by the end of this fiscal which will be almost the double of the last financial year’s supply. Demand cannot match the supply and the most optimistic estimation is around 1.1 million CBM. In other words, FY 2019 will see more MDF flooding the market than it can absorb. This will definitely pull down the price further down. By FY21, the MDF industry is expected to witness further increase in capacity to 1.9mn CBM with Rushil Décor expected to add capacity in South India. In other words, capacity will remain in excess of demand in the foreseeable future and will not vanish so soon. Thus, prices are likely to remain depressed at least 2-3 years.
However, there may be some good news too for the industry in the form of some players holding back their expansion plans as is in the case of Century Plyboards. Also, demand scenario may change for the better with the entry of IKEA who will be mainly using MDF for its furniture. Further, price of Indian MDF can become attractive in international market if the rupee depreciation continues. Also this can prevent the Chinese MDF flooding the market. Only South based units will have the advantage of export market as exporting MDF from North based units is commercially not viable due to higher logistic costs. Similarly, South based units are exposed to dumping risks too and imported MDF will not be viable in Northern markets due to transportation costs. All these scenarios cannot be totally ruled out but at this juncture it is difficult to predict.
MDF manufacturer also hoped to capture sizeable market share of lower end plywood post introduction of GST. Low end plywood is mostly manufactured by the informal sector and it was hoped that post GST introduction informal sector may find it difficult to compete with the organised sector due to level playing field created by the new indirect taxation regime. However, tax compliance in the informal sector has not picked up even after introduction of GST and subsequently e-way bill system due too weak surveillance system. As a result, informal sector enjoys price advantage over organised sector due to scope for tax avoidance. This has slowed down the shifting of market share from informal plywood segment to organised plywood and MDF segment. This is also one of the reasons for some of the MDF players’ calculations going haywire.