Timber and ‘the path of least resistance’
China’s recent ban on timber imports from Australia may be a blessing in disguise, writes JOHN POWER.
One of the few laws of physics I recall from school relates to ‘the path of least resistance’, i.e., the rule that an object will always follow the easiest path if left to its own devices.
In the case of Australia’s international timber trade over the past 20 years, the ‘path of least resistance’ has led straight to China – our largest overall trading partner, and by far the dominant purchaser of Australian timber.
In 2017-18, Australia harvested 32.9million m3 of logs, comprising 17.4 million m3 of plantation softwood, 11.3 million m3 of plantation hardwood, and 4.3 million m3 of native forest hardwood. From this harvest China bought practically all plantation hardwood and almost half of our native forest hardwood, according to a Commonwealth Government report1 released in November 2019. The domestic market retained the majority of harvested plantation softwood for housing construction and similar building applications.
The same report proudly described Australia as the largest exporter (by volume) of woodchips in the world, and the eighth largest exporter (by volume) of logs, with revenue of $3.6 billion.
Notwithstanding these figures, Australia was a net importer of wood products (by value) in 2017-18, spending $5.6 billion on foreign items including paper, furniture, wood-based panels, and similar processed goods. So, while our gargantuan export volumes may have looked impressive, their dollar value was just over half that of imported wood products.
This begs the question: Have we been underselling our timber resources? Or has the ‘path of least resistance’ encouraged us to become apathetic, favouring the convenience of sending low-value, unprocessed woodchip and log exports to one major destination?
Any monopoly, regardless of whether it refers to a buyer or seller, is dangerous. The simplicity of dealing with China as our dominant timber-trading partner post-2000 definitely served to create a linear, straightforward trading platform, but it also left little incentive for Australian merchants to add value to their raw product or embrace the complexity of a more diverse clientele. Then came an abrupt wake-up call in late 2020, when China stopped timber imports from New South Wales, Western Australia, and then Victoria, Queensland, Tasmania and South Australia. The public justification for these suspensions was the discovery of pest insects in timber samples, though this allegation was widely dismissed by market analysts, who saw the bans as politically motivated. Overnight, many of the so-called ‘advantages’ of dealing with a single major trading partner were overturned, leaving many Australian employees jobless and the industry vulnerable to the capriciousness of a single client. Even before the import disruptions took effect, many industry insiders were nervous that a monopolistic China could mount an attack against timber prices at any time, ruthlessly adopting a ‘take it or leave it’ approach and purchasing more product from rivals like Canada and the USA.
In other words, Australia created problems for itself in two ways: by opting for the simplicity of a single major trading partner, ignoring the numerous perils associated with putting all of one’s eggs into one basket; and by specialising in bulk, unprocessed products rather than value-added, processed goods.
Out of the frying pan…
To make matters worse, the bushfires of early 2020 exposed yet another fragility of our timber reserves, with businesses dramatically destabilised by the harsh realities of unforeseen catastrophes. The destruction of 18 million hectares of forest not only impacted forests and plantations directly earmarked for timber harvesting, but it also sent shivers down the spines of potential investors, further eroding confidence in an already stagnating plantation industry – there have been virtually no establishments of new plantations in Australia for over a decade. After all, given the ever-present threat of future bushfires, diseases, and market fluctuations, who would want to take a gamble on a long-term investment in timber instead of short-term gains from grazing?
With plantation establishment in free-fall and timber merchants prioritising export channels, there has been a natural negative effect on local supply. Indeed, softwood exports have reportedly been on the rise since late last year, leaving smaller domestic mills in regions like western Victoria undersupplied. One operator, Roundwood Solutions in Mount Gambier, told the ABC last September that many growers were bypassing Australian mills and choosing to export wood as a first priority.
Unsurprisingly, there have been calls for a government-backed code of conduct to ensure guaranteed domestic supply.
A solution may not be straightforward. On the one hand, a more controlled domestic industry would challenge free international market forces and undermine existing harvesting rights and foreign ownership provisions. On the other hand, a centralised code would consider the Australian timber industry within a more sophisticated context, taking account of: domestic timber demand, deforestation, climate change, the practices of other agricultural sectors that involve land clearing, environmental protections, as well as other government campaigns encouraging increased local manufacturing.
One of the biggest arguments in favour of retaining current export-biased trade channels has been the requirement for industrial consistency, i.e., mills, plantation owners, haulers and allied sectors need the regularity of a reliable export market to overcome the ups and downs of our small domestic industry, which is beholden to peaks and troughs within the building sector. This argument does not hold water. While export-oriented timber companies employ hundreds of staff in renowned regions like of the Golden Triangle (western Victoria and southeastern SA), hundreds of other jobs have been lost through the closure or consolidation of operations with more domestic focuses. As the abovementioned report states, ‘…from 1999-00 to 2016-17, the number of [Australian] softwood sawmills decreased by around 73 per cent (from 279 to 75) while the volume of softwood sawlogs processed domestically increased by 27 per cent.” Meantime, “Since 2012-13, exports have risen by 76 per cent…”
In other words, this transition from mostly domestic sales to ever-increasing exports has not increased employment at all; rather, it has lowered it while placing control of the industry into fewer hands.
More worryingly, this process has taken place without any effective oversight of the need for guaranteed local supply, and without any consideration of the social or monetary value of smaller regional mills.
Solutions, therefore, must occur with regulatory strength to recognise timber as a vital resource of local significance, not just a commodity to be sold with the least effort to the highest bidder.
At least two remedial actions are required as a priority. The first must be to satisfy local demand before addressing exports. This radical change in philosophy would be unpopular, of course, as it would place speed humps along the ‘path of least resistance’ and compel plantation owners to deal more strategically with local mills – a far messier enterprise than heading straight for the docks, and one that might lower prices momentarily. On the flip side, a more robust local trade would encourage growers to refresh their practices to meet specific market needs, responding to trends and actually improving their product quality.
The second remedial action relates to the need for added value. For too long exported woodchips and logs have been regarded as the equivalent of iron ore, i.e., high-volume product without much processing required. A strategic means of adding value would be to encourage second- and third-tier manufacturing businesses like paper and wood panel production, and by augmenting local processing facilities, particularly for hardwood. Such manufacturing operations would not only add value to raw wood materials, but they would also open up new markets, both domestic and foreign, through increased value rather than volume.
It is never easy to sidestep the ‘path of least resistance’, but sometimes the harder path is the best way forward in the long term. By taking remedial actions like those described above, our local markets might thrive while enhancing the respect we afford to timber.
“Snapshot of Australia’s Forest Industry,” ABARES Insights, Issue 5, 2019.
China’s log export suspension continues
With China’s suspension of log exports from Australia now citing phytosanitary concerns with no indication of when trade may resume, Australian log exporters are continuing to work closely with the Federal Government to strengthen fumigation requirements, according to Australian Forest Products Association (AFPA).
The AFPA hopes this will address the Chinese Government’s concerns and allow for the resumption of the log trade as soon as possible, the spokesperson said recently.
“It is important to recognise that the Australian log export market is largely distinct to the domestic log processing sector and the resource is not interchangeable. Every tree that is harvested is made up of a mix of high-quality saw log, lower quality logs (pulp logs) and wood residues. All these need a market (either domestically or via export) for the whole supply chain to operate. Especially in the lower quality logs and residues, there is insufficient scale in plants in Australia to process the materials which forest operations generate,” the spokesperson said.
The trade suspension has already had a significant impact on the harvest and haulage sector, impacting hundreds of jobs nationally as a result of forest thinning as well as deferring harvesting and haulage work, according to the AFPA spokesperson. If the trade suspension continues for months or even years, it will severely impact the whole supply chain, along with thousands more jobs, he said.
“China accounts for more than 90 per cent of Australian log exports, so alternative markets cannot readily replace it. However, the AFPA is working closely with its members and the Australian Government to identify short- and longer-term solutions to support the domestic manufacturing sector and process more of the resource that is currently being exported,” the spokesperson said.
For now, the AFPA will continue working closely with the Australian Government to identify alternative export markets for at least some of the logs that were previously exported to China.
A word from TABMA CEO – David Little
As we enter 2021, most TABMA members I have spoken with have reported that some of their major concerns for the year ahead include the continuation of chronic materials shortage across the hardware and building materials categories – as this is notably not just softwood or LVL. Members are also concerned with the annual challenge of staffing up as the trade sector gets back to full steam.
Compounding the supply problem is the ancient issue of margin erosion due to heavy discounting (particularly in frame and truss sectors), even when demand far exceeds supply! Those old enough to remember the TABMA price list might have a view that this still has a place…
From an employment perspective, clearly the most significant program running today is the Federal Government’s Boosting Apprenticeships Scheme. The scheme offers employers up to $7,000 in financial support, per quarter, for the engagement of a trainee, or for gaining formal qualifications for existing frame and truss workers. Take up for this program has been patchy in the industry to date, with larger organisations quick to seize the opportunity, while smaller operators have remained conservative.
Of the 100,000 placements offered by the Federal Government, we estimate (actual numbers are not available) around 80,000 placements have already been taken up; including business owners and managers who are taking advantage of this once in a generation support program. TABMA has continued recruiting right through to Christmas, chasing school leavers as they return from schoolies or end of year holidays with their parents, and we already have a database of applicants seeking employment across Australia.
Through our Trade Credit Bureau, TABMA has also been watching the collections numbers with some trepidation, but thankfully we still have not seen a blow out in collection days or a significant increase in builders winding up. Most of us though are waiting for the April to June quarter and the end of protections and stimuli to see the real picture. The result is that while trading remains strong; confidence remains relatively low for many. Certainly, we will know more about the underlying strength of our sector in the next few months.