For the wood panel industry that's already grappling with soaring timber costs and an oversupply of medium-density fibreboard, or MDF, the government's decision to defer a much-awaited quality check has triggered worries, including of a further surge in imports.
The government recently deferred the implementation of the Bureau of Indian Standard rules relating to the quality for MDF and particleboard by a year, which experts say could further aggravate near-term issues for the industry. china red oak veneer
The rules will now be effective from 11 February 2025 instead of from 11 February this year.
"If the rollout had occurred earlier, it might have further stimulated domestic production," Keshav Bhajanka, executive director, Century Plyboards (India), told Mint, adding that there will be a short-term negative impact. "Nevertheless, the long-term outlook remains robust."
Even as the domestic wood market has been expanding in FY24, imports accounted for a large share of the growth.
Implementation of the BIS rules is expected to reduce imports, benefiting domestic manufacturers, Greenpanel Industries Ltd, the largest MDF player in terms of capacity, said during its December-quarter earnings call.
But now that implementation of the BIS rules has been delayed, it could open the floodgates for imports, say experts. Imports had briefly paused at the beginning of calendar 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, on 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 rules 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 rules. 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 sales 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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