Why MDF producers are not out of the woods yet

At the same time, the Indian government has deferred the Bureau of Indian Standard norms relating to quality for MDF and particleboard by a year. The norms will now be effective from 11 February 2025 instead of 11 February 2024. This deferment could further aggravate near-term issues for the industry. 

Even as the domestic market has been growing in FY24, imports took away a large share of the growth from domestic producers.  

Once the BIS norms are enforced, there will be a monthly reduction in imports with resultant benefits being passed on to domestic manufacturers, Greenpanel Industries Ltd, the largest MDF player in terms of capacity, had said during its December quarter earnings call. 

But now that the norm implementation is delayed, it is expected to open the floodgates for imports, which had briefly paused at the beginning of 2024, and are anticipated to soar back to the elevated levels witnessed in the first half of FY24. 

With imports potentially flooding India again, volumes and margins of domestic MDF manufacturers are expected to take a beating in the near term.  

“MDF players are expected to be haunted by: i) elevated imports; ii) addition of sizeable capacity; and iii) high timber costs, which are likely to persist in the near term,” said analysts at Nuvama Institutional Equities. 

Yet, looking at the bright side, the long-term narrative for MDF manufacturers stays staunch.  

“When the BIS standards kick in, imports are expected to drop, giving domestic players more control over pricing, in turn leading to higher realization and sales,” said Saurabh Ginodia, senior vice president, SMIFS (formerly Stewart & Mackertich Wealth Management). 

He explained that influx of inferior quality MDF into India from Vietnam and Indonesia was the main worry for domestic players, and the implementation of the BIS norms will address this issue. 

There could be some wariness regarding the cost of production that could increase for domestic companies given the need for infrastructure upgrades to comply with BIS norms. However, this increase could potentially be offset by a decrease in the currently high wood prices. 

As far as wood prices are concerned, Greenpanel said it is not expecting any significant reduction in wood prices during the March quarter or even the next financial year. 

“…I think they would possibly start reducing from FY26 only,” said Vishwanathan Venkatramani, chief financial officer, Greenpanel, in its recent earnings call. 

Even Century Plyboards (India), the largest listed particleboard company in terms of capacity, pointed out that the profitability in particleboard is significantly affected due to lower average realization caused by import competition, and higher raw-material cost. 

The company also said that making BIS mandatory would not only cut down imports for MDF and particleboard but also boost both sale and profitability of domestic producers. 

Meanwhile, in the unorganized space in India, Nuvama highlighted that as many as 70% of plyboard units, 90% of MDF and particleboard units, and 100% imported panels do not have a BIS licence yet. 

A delay in implementation of BIS would help them to streamline and prepare for the forthcoming regulations next year. 

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Published: 19 Mar 2024, 01:43 PM IST