Australia’s challenging timber supply

FWPA (Forest and Wood Products Australia) Program Manager, Jim Houghton, recently spoke at the MGA/TMA (Timber Merchants Australia & Master Grocers Association) lunch, giving a run-down on the demand of timber supply in Australia, which remains at capacity, and his thoughts on how increasing demand will be met in the future.

Running the statistics and economic program for the FWPA, Mr Houghton said a big part of the program is about improving the information that is available to the industry, which may assist with operations and long-term investment decision-making.

In terms of supply and demand, apparent consumption is pretty critical, which is why substitute products have been focusing a bit of attention in the last year or two, according to Mr Houghton.

“In saw log production, the decline in native forest has seen saw log become quite pronounced over the last 10 years or so and that is basically the outcome of years of community views on what we should do with our native forests. This is why the softwood plantation resource has been so critical and what is fundamentally providing the sawn timber that is building our homes. This has gone up significantly, by 46 per cent, of sawn saw log coming out of an estate.”

“There has also been a slight pickup with the hardwood plantation saw log, but it will be a long a time before this is usable in the timber construction of our own homes. Primarily that saw log is being exported to countries like China, who are using it as a small saw log and turning it into veneer and plywood type products. The data comes from the Federal Government as they are the major keepers of the data within the industry, with the ‘Australian Forest and Wood Products Statistics’ published every six months. The challenge is often that the data is six to 12 months behind where we are at now,” Mr Houghton said.

Sawn timber production and market run down

As there has been a big change in the mix of sawn timber production in recent times, Mr Houghton said primarily these changes have included a great decline in hardwood and a big increase in softwood. 

These changes bring us to the key picture, which is apparent consumption, he said.

“The reason why apparent consumption is pretty critical for driving everything is that it takes into account production, and our net trade position. Therefore, it is reflective of imports and exports because at the same time we are producing materials here which are also exported. Our net trade position is critical to the discussion of the supply position,” he said.

According to Mr Houghton the data the FWPA collects on behalf of the industry is based on a data set that 14 of Australia’s major saw millers contribute to. The saw millers submit the data each month, with data collected on about 55 different product categories, including information on their monthly sales. The current data is showing the critical situation where the industry is operating at capacity, with the industry currently working at about 3.1 million cubic metres of production per year.

“To put that in context, those 14 saw milling businesses are probably representing about 90 per cent of Australia’s monthly production. To some extent this data also tells us what is happening in the supply position. What it is telling us is that while that (supply) has grown one per cent over the last 12 months, it is pretty much at capacity. This is also in a market place where we continue to have very, very strong demand.”

When looking at the specific products that make up that 3.1 million cubic metres, treated material, which is treated for termites, is now the more dominant product than traditional untreated structural timber. 

When putting the two materials together, this equates to nearly 1.5 million cubic metres of material produced by these saw mills in Australia, which is just under 50 per cent of the total wood product produced on an annualised basis, according to Mr Houghton. The 1.5 million cubic metres is the same material that independents are most likely to stock within their businesses and is the same material that is building Australia’s houses.

The problem with pricing

After working with the same group of saw millers for several years, the FWPA has attempted to put together information on what is happening with the price of timber, even though Australia is often quite challenged with pricing information.

“We do have access to the ‘Timber Market Survey’, which is a six monthly publication produced on behalf of the growers and is based on retail sales of that range of timber materials. The growers use this to adjust the price of saw logs to their customers,” he said. 

“In the last few years that pricing mechanism has become quite contentious because the growers, through that process, have continued to identify price increases in the market place, which post the GFC the saw millers themselves were not necessarily seeing. They found they were in a difficult position, as a saw milling business, because the price of their logs were increasing due to this market signal. But in fact in their own businesses their prices were either static or not moving at the same levels, because they are selling into lower tiers of the distribution chain.”

“Since March 2017 the market has been less contentious because saw millers are getting good money for their material. This becomes critical of the supply/demand dynamics right now, because we have had a situation prior to this, in 2015, where prices were pretty high then they declined. However, that decline is quite illogical from an economic perspective because they demand conditions, in terms of the current outlook, that are quite consistent for the same four to five years.” 

“As an industry, and yet against that backdrop, we have seen prices decline in 2015. So whilst in a retailer’s business they may think that is a good thing, because you can buy your material cheaper, the reality is that movement in price, which is illogical, has caused a major problem,” Mr Houghton said.

Imports balance out the market

This is where the import side of the equation is so critical because historically imports have been an important balancing part of the supply of material in the Australian market. Even in 2000 and 1990, Australia has had imports of about one million cubic metres a year, according to Mr Houghton.

FWA Program Manager, Tim Houghton.

“When the GFC hit, we had import levels of about 550 cubic metres and then volumes of imports increased. Historically Australia was a good paying market for importers. We had high local prices so there was really no issue about the volume of imports; they were a nice buffer. But in recent times, importers have markets available to them in North America,” he said.

“In June this year the prices in North America for sawn timber products eased. Leading into June there was a situation in Australia where we had prices declining in the period prior to that. Basically, the countries that supply us with imports, Scandinavia predominantly, these countries, as well as their own markets in Europe, are looking at very good markets in North America. So if the prices in the Australian market move up, volume moves up. So we now have a pretty strong buffer between global pricing and the availability in imported material coming to the Australian market.”

“Volumes are now at record levels, at over 800,000 cubic metres of imported material and interestingly the prices are higher, but they are not higher than they were 12 months ago. The reason why we were able to attract continuing volumes into this market is that prices are high enough. With the drop in prices in North America, importers are now at a stage where Australia becomes attractive again.”

“When looking at the future of supply you kind of look at this whole question of equilibrium of where demand and supply meet, and price is always the signal that drives that. That is what happens in a market system,” Mr Houghton said.

Substitute products

Ever increasing timber prices can raise questions as to whether these price rises create an environment of alternative products, like steel framing, to become more attractive in the market. If the Australian market is working at full capacity locally, and importers only bring imported volumes here, if Australia can match international prices, the reality is prices will keep going up to the point of which demand is met, according to Mr Houghton. 

If those prices are at levels where they make alternative products more competitive, then that is exactly what happens in a market and we are starting to see elements of that, he said.

“We have done some work with the Housing Industry Association to try and understand what is happening with steel. They did a survey of their members and the results show steel penetration has increased and this is probably a reality you are seeing in your businesses. However, this is a challenge for us because when demand is at these levels, we need the prices at these levels in order for the imports to come in and provide the balancing act for the market.”

“Even if local saw millers want to maintain their market share, the reality is it is difficult to do that because they are currently working at capacity. It would be a different story of we had another million cubic metres of saw milling capacity that could supply into this demand, then the answer would be easy. We would just protect market share by reducing price. But demand is greater than our capacity to produce,” he said.

Challenging resources

The challenge of limited resources remains because the resource outlook is static, with softwood estates remaining at one million hectares since around 1996. Mr Houghton pointed out that although trees are harvested and replanted, plantations are not adding to the estate. 

The Federal Government recently stepped up in an attempt to reduce Australia’s timber shortfall, with its Billion Tree Program.

“The investment since that time has been predominantly in fast rotation eucalypt and that is about topped out as well. So the saw log outlook is really quite bleak, with plans already in place at looking at estates to plant more trees, support saw milling production and supporting the demand,” he said.

By 2050 the shortfall of timber, or the demand for softwood saw logs versus the supply of softwood saw logs, is actually 3.4 million cubic metres. At the end of the day, we need more hectares to support that shortfall, he said.

“The challenge is, there is a mismatch with the investment in the processing sector because we are now exporting about 4.5 million cubic metres of softwood log, which are not all saw logs, and would be typically processed by a processor here. About a million of exported saw logs are small saw logs. They go to China, are peeled in China, and turned into structural products. But that fibre could technically be used to produce some engineered wood products to be used in the structural market here,”

“So the shortfall is not necessarily driven by what saw millers are doing. We do have more fibre available in this shortfall but at the moment the investment to convert those logs into products we might use in housing construction, has not been made – which is a challenge,” Mr Houghton said.

The Federal Government has also stepped up in an attempt to reduce this future shortfall with the implementation of its Billion Tree Program.

“The Billion Tree Program is a $20 million Government initiative projected to fill this shortfall, which is not a lot of money. Because of the amount money involved it will really only focus on pilot projects and facilitation. Some of this money will be used to help work out how to get more trees in the ground. At the end of the day the key message here is to plant the right trees, in the right places, on the right scale,” he said.

“Demand continues to be strong. Local production of softwood is up and the local production of sawn timber is up. But the challenge is that it is at maximum capacity now. We are only going to get a change in the supply of structural building material if there is a different type of investment to convert some of the available softwood resources currently being exported.” 

“Imports are critical but we are not going to be able to maintain imports at the level needed unless prices stay at levels that enable. I would keep an eye on North America, in terms of pricing, to understand what will happen with pricing in our local market. More trees in the ground are needed and that is why we are seeing the emergence of more substitute products,” Mr Houghton said.

The challenge remains

However, the challenge remains because prices will only remain at these levels or go higher, according to Mr Houghton, which is why there is now an opportunity for substitute product. 

“Historically timber is a great product and most of the local builders are in an environment where they have worked with timber all of their lives. Therefore, you could not have a better backdrop with our market.”

As the Australian timber industry continues to work at capacity, and supply constraints are ongoing, then the only response to this is price, according to Mr Houghton, which will continue to open the market up for competing products.