October 1, 2021

Where has all the timber gone?

An opinion piece from Northpine general manager BRUCE LARSEN.

Where has all the timber gone?

Structural timber remains in short supply nationwide. No matter how fast and how hard timber manufacturers go, they can’t keep up with demand. 

Coming into this pandemic the construction industry was heading towards the top end of the cycle; demand was very good, and the housing shortage was pumping the industry along. 

Then Covid-19 arrived, late in the summer of 2020. Forecasts were all very bleak, mills ran down stock and braced for a serious recession. The country’s borders were closed, and everyone decided it was a great time to build the bach, extend the house, or catch up on a 40,000-unit national house shortage! The building boom just grew, pushing demand beyond what was already the top of the natural market cycle. Timber processors just didn’t have capacity on standby for extra sales at an unprecedented level.

Everyone in the industry expected that, as sawmills flexed their capacity and CHH mastered their upgraded sawmill at Kawerau, the traditional winter slowdown would kick in. Surely demand and supply would begin to balance. However, with the summer of 2022 now approaching and Auckland just out of the longest lockdown in our history, we don’t seem to have made much headway. Why?

It is not the lack of logs. Logs are available if you pay the market rates. So, while we Kiwis are paying international prices for locally grown raw materials, that isn’t stopping production. Timber manufacturing is suffering from labour shortages – some quite specialist, and with borders closed and near full employment in the country, labour can be a constraint. But most businesses are managing. Cost of all inputs is increasing – labour, cartage, consumables - but again, it isn’t holding back production, just making it more expensive.

The answer lies in the environment surrounding the timber processing industry. As with all commodity industries, the big tend to get bigger and the small and inefficient go out of business. Over the last 20 years we have seen the closure of around 50-55 sawmills but the production of sawn timber in New Zealand has remained very steady. Essentially the bigger mills have pushed out the smaller operators – much as a supermarket will make it very hard for the local dairy. These big high-capacity sawmills are designed to run at (or close to) full capacity all the time – they pump out huge volumes at low cost. If they aren’t running at high volumes the economics of the massive investment just doesn’t stack up, and therefore they are not very adept at flexing with changes in demand. Is this why we have very little ‘surge’ capacity in our supply system?

The smaller mills that have survived in this ‘dog-eat-dog’ environment generally have some specialist products or niche customers, or some manner of differentiation that has allowed them to survive. They have also, however, developed ‘street smarts’ to navigate their way through a tough commercial environment dominated by a few big players. While forest growing has been seen as a good investment by large overseas companies and small ‘Mum and Dad’ investors alike, the wood processing sector has had no such backing. The small players in the industry have had little support from the government or from financial institutions. In fact, they are frequently labelled as inefficient. However, they remain in business because they have some strategic advantages within their structure, their market or their product mix, and generally also because transporting logs and timber is a very expensive exercise. Regional manufacturing can be efficient and can significantly reduce the carbon cost of transporting bulk products around the country. Forest growers located close to a port have lower cartage costs compared to those growing their trees many kilometres away; therefore, their returns can be significantly better. The same with sawmills. Those with minimal cartage costs for both logs and lumber can operate in a manner that competes with the big players – especially if they manufacture products that the large mills can’t or won’t.

With the two biggest companies – CHH and Red Stag – accounting for approximately 65% of the timber production in New Zealand, the small players who can flex their production and product ranges can only make a relatively small difference to supply volumes. If each one of these mills finds an extra 15% it only accounts for around five percent of the total production per year, and as some of these manufacturers have specialist markets offshore, the increase is even less. So unless the government supports investment in the processing sector, and banks, investment institutions and even small-scale investors decide there is a future in timber manufacturing, it will take time to reduce the local shortages and build a strong export industry for the future.

Northpine continues to develop its specialist range of solid wood components marketed under the Northbeam brand, while supporting the independent local timber merchants in the North. The aim is to grow capacity while ensuring that the business is still operating in another 20 years.

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