NZ Com Com investigates timber supply shortage

by | Mar 31, 2021

The New Zealand Commerce Commission is set to investigate Carter Holt Harvey’s decision to halt timber supply to select retailers, while choosing to supply large customers, according to a recent report

The competition watchdog said it wants to resolve why the timber company, partly owned by New Zealand’s richest person Graeme Hart, has ceased supply to Mitre 10, Bunnings and ITM, while choosing to supply its larger customers including Fletcher Building-owned PlaceMakers and its own subsidiary, Carters.

The Commerce Commission also reported that it is aware Carter Holt had not specifically advised it of intentions to cease supply to the relevant parties, despite the increasing issue involving building supplies currently.

Carter Holt Harvey’s decision has not only led to stockpiling of timber, but also created additional pressure to building supplies, according to the report, with retailers forced to seek new suppliers due to the fear and uncertainty within the current market.

“So far we have only been mildly affected for certain products but it is the longer lead times that are concerning, more than not getting it at all. Up to three weeks in some cases which is outrageous,” Auckland builder Blake Cooper said in the report.

Master Builders Association Chief Executive, David Kelly, said small building businesses would be hit the hardest.

“The larger builders typically have arrangements in place and supply agreements are less likely to be impacted than the standalone builder. Merchants will be searching around for materials and it is likely there will be delays in supply which will have a flow-on effect,” he said.

“We have already got issues with price escalations in the construction industry, and I hope the merchants behave responsibly and do not take advantage of this to start pushing up prices. It is critical to the industry that we communicate so builders know how to plan,” Mr Kelly said in the report.

New Zealand Institute of Forestry President James Treadwell also said in the report that while local demand was increasing for timber, it was not enough to impact supply. The issue was more a “power move” to fight low prices dictated by Bunnings, Mitre 10 and ITM.

A number of 10-year contracts with suppliers had also come to an end and Carter Holt Harvey had decided not to renew them, Mr Treadwell said in the report.

The four causes of timber shortage in NZ and how it may be resolved

Red Stag Timber Group Chief Executive Officer, Marty Verry recently released an opinion piece that not only investigates the four causes of timber shortage in New Zealand, but also what can be done about the current crisis. The following is an excerpt from his piece.

New Zealand’s current shortage of framing timber is a result of a global phenomenon compounded by unfortunate timing missteps by New Zealand’s largest supplier Carter Holt Harvey (CHH).

Just one year ago, the construction industry was at the top of the cycle, with saw millers, like any manufacturers, investing in capacity based on forecast demand.

Then COVID arrived, interest rates were slashed, borders were closed, and people around the world decided that was a great time to build, extend the house, or catch up on the global housing shortage. A further building boom ensued, pushing demand beyond what was already the top of the natural market cycle.

There are now similar shortages in Australia, the UK, Europe and the USA. This also explains why New Zealand cannot readily turn to imported framing timber to solve this short-term problem.

The global shortage might not have affected New Zealand had it not been for two events at CHH in the last 18 months. To put this in context one needs to understand the structure and trends in the framing supply market in New Zealand.

There is a long term global trend toward very large scale sawmilling operations, and consolidation of the sector as a result. Red Stag has led this with the construction of the Southern Hemisphere’s largest sawmill in Rotorua. It produces over 600,000 cubic meters of timber annually and supplies 25 percent of the New Zealand framing market.

CHH owned the second, third and fourth largest sawmills based in Kawarau, Whangarei and Nelson respectively, with a market share of around 45 per cent.

In response to a shortage of high density ‘structural’ sawlogs in Northland – created due to the overcutting on young forests for export a decade ago – CHH elected to close the Whangarei mill and scale up the Kawarau mill.

That was an entirely rational thing to do and something the industry expected would happen for many years. It would have been fine had the Kawarau upgrade worked as planned. Unfortunately, the upgrade required an extra-long Christmas shut this year and the site has struggled to produce the capacity expected since then. With the benefit of hindsight, it would have been better to await the successful Kawarau upgrade before closing the Whangarei mill this time last year.

All of this has now created a shortage of timber over the traditionally busy summer and autumn period. CHH was struggling to supply its sister company Carters and its supply contract to PlaceMakers, whilst also supporting customers from other merchant chains, some of which the mills had supplied for decades.

The surprising move came on recently when ITM, Mitre 10 and other independents were informed that their supply would be stopped forthwith. It is important to note that not all stores in these chains are affected.

Red Stag supplies many of the larger stores in these chains as well as PlaceMakers so its customers will be largely unaffected. Others have good relationships with other sawmills, of which there are around two dozen.

What tends to happen in these circumstances is suppliers look after their most loyal historic customers. Merchants will do the same. Those that miss out are likely to be the customers that have shopped around too much, haggled too hard on price, paid late, or been difficult to deal with. The point is, it will be business as usual for much of the industry.

My estimate is that there is a current shortage in New Zealand of between five and 10 per cent. Others may say more, but what typically happens is the short-supplied stores or customers search around the market for supply giving the impression that there is more shortage than there really is.

However, even at five to 10 per cent, this is a problem at a time when the government is trying to scale up construction. Red Stag and the other sawmills will flex to try to supply more in the short term, but capacity is already stretched. It takes several years of planning, plant manufacture, ordering and installation to bring on meaningful capacity in sawmilling.

In Red Stag’s case, it has increased capacity from 200,000 to over 600,000 cubic meters in the last 15 years, and will likely push on to one million capacity in the coming decade.

One of the issues in the short term is that customers are committed to three months in advance, meaning it is hard to divert volume from export customers already committed to.  Once CHH gets comfortable with its Kawarau output and stocking levels I expect it will make volume available again to spurned customers.

That might take until June, when things start to slow down a bit in the market anyway due to winter. The proviso here is whether this is a market share play by CHH’s owners Rank Group to sell its sawmills – something it has been trying to do for over a decade.

The main volume of new material coming into the New Zealand market will be from [Red Stag’s] new Cross Laminated Timber (CLT) factory in Rotorua, to open in May.

The Red Stag factory has the capacity to supply 2,000 apartment units annually, so around five per cent of New Zealand’s housing needs, and much of the current timber shortage if the market adjusts to use that product. CLT is ideal for mid-floors of terraced houses, so will also help alleviate the market shortage of ‘wide’ boards.

Kaianga Ora is the most experienced user of CLT in its apartment blocks of three storeys and above. It forecasts building hundreds of dwelling units annually with the product, yet it makes up only a portion of its build program.

If the government wanted to act strategically to alleviate the timber shortage, it would focus Kaianga Ora on using a lot more CLT, and in doing so free up framing timber for the general market to use. Across the foregoing factors, I expect the timber supply could be back in balance in six months.