Bruce's Blog

For the first time in several years, there are genuine signs that New Zealand's structural timber market is beginning to rebalance.

That statement may seem surprising. We are in the middle of winter, traditionally a slower period for construction activity. Tensions in the Middle East continue to create uncertainty around fuel prices, which remain well above pre-war levels despite easing from recent peaks. New Zealand is also entering a General Election campaign, a period that has historically encouraged developers and investors to delay decisions until there is greater political certainty.

Against that backdrop, many would expect timber demand to remain subdued. Yet across much of the processing sector the opposite appears to be occurring.

Order books have strengthened, and after several years of absorbing cost increases, producers have begun implementing price rises, including fuel adjustments, that are largely being accepted by the market. There is a growing sense that the severe downturn experienced since the post-Covid construction peak may finally be easing.

Why?

Part of the answer lies in stronger demand. Residential construction appears to be showing early signs of recovery after a prolonged period of decline. Interest rates are affordable and possibly as low as they will go this cycle and  inflation pressures have moderated. While building activity remains well below the highs of recent years, even modest growth can have a significant impact when supply has become constrained.

And it is on the supply side where the biggest changes have occurred.

Over the past two years New Zealand has seen several processing operations suspend production or close altogether. Every mill closure removes capacity from the market, and that capacity is rarely replaced quickly. At the same time, substantial quantities of structural timber are now being exported - to improve processors’ market diversification - reducing the volume available domestically.

The result is a supply-and-demand balance considerably tighter than anticipated in January.

The challenge for processors is that cost pressures have not eased.

Fuel remains one of the most significant issues. While much attention is given to the cost of delivering finished timber products, the impact extends much further back through the supply chain. Harvesting contractors, log transport operators and forest owners have all been affected by sustained increases in fuel costs. In many regions harvesting and cartage costs have risen dramatically, reducing returns to forest owners and making some harvesting operations uneconomic.

Generally, export log prices have been unable to absorb those additional costs. As all forests have an export component (typically the lower grade and smaller logs), this has resulted in harvesting activity slowing or, in some cases, stopping altogether. Fewer logs harvested means fewer logs available to domestic processors, which in turn places additional pressure on supply and pricing.

Nor is fuel the only cost challenge facing the industry.

Electricity prices remain high, treatment chemical costs continue to increase and compliance obligations continue to expand. Health and safety requirements, environmental management, training and regulatory reporting  - all essential parts of operating a modern sawmill - come at a cost. Few processors can point to any major area of their business where costs have materially reduced over the past five years.

Few industry participants expect fuel prices, electricity costs or compliance expenses to return to pre-pandemic levels any time soon. In practical terms, this means a significant portion of today's higher cost base is likely to remain with us.

Looking ahead, the outlook for the next six to twelve months remains difficult to predict.

If residential construction continues to recover and commercial building activity begins to improve, further timber price increases during spring would not be surprising. Supply remains relatively tight and processors are under ongoing pressure to recover rising manufacturing costs.

The general election in November introduces another layer of uncertainty. Current polling suggests a closely contested result. A change of government often leads to a period of caution among investors, developers and businesses. If that occurs, the improvement we are currently seeing could stall temporarily.

Conversely, continuity of policy may provide greater confidence and support a gradual improvement in construction activity.

Confidence is returning, but it remains cautious. Most timber processors are not yet talking about expansion; they are talking about sustainability, margin recovery and ensuring their businesses remain viable.

New Zealand cannot afford to lose further domestic processing capacity. Once mills close, that capability is rarely replaced quickly. If we want a resilient construction sector supplied with locally manufactured structural timber, maintaining a profitable and sustainable processing industry must remain a national priority. The current market improvement is encouraging, but there is still a long way to go.