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Contradictions and tensions with ongoing softwood timber supply

John Halkett, head of the Australian Timber Importers Federation (ATIF) provided the following analysis and opinion for Statistics Count. The views expressed are those of ATIF and Mr Halkett.

The Australian softwood timber market appears to be exhibiting some curious contradictions. Presently demand for domestic softwood products appears to be very strong with most producers reporting close to full order books. This notwithstanding there is little evidence that the market is oversupplied; to the contrary the market appears to be undersupplied. 

Although perhaps appearing to be counter-intuitive, there is statistical evidence of some easing of softwood timber imports. Clearly, a general price increase in April 2017 has not yet equated to increased imports. 

fig16

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Builders and manufacturers are reporting difficulties with the supply of some softwood structural lines, and given that domestic production is at about, or even above medium term capacity, it could reasonably be expected that prices would rise with elevated demand and/or that imports would increase. 

However, timber wholesalers are not all bullish, and prices have not moved sufficiently in what might be described as a tight supply situation. So what is going on beneath the surface?

Residential housing demand softening

There is evidence that the housing market is starting to ease, and this may continue in the immediate future. As a consequence of the reality that domestic building activity has deteriorated by about 5-10 per cent, importers with long lead times are reluctant to commit to further inventory in case the market softens even further. This, coupled with a clear trend towards apartments, rather than detached housing, has implications for the softwood timber market. 

Supply chain dynamics

Timber importers have to factor in significant lead times in import supply channels, and are therefore likely to exhibit more conservative ordering behaviour in a softening market, and to pay added attention to managing inventory levels. So a short period of demand imbalance does not necessarily result in an immediate increase in orders from long lead time overseas suppliers. 

Also, well established supply chain mechanisms can have local characteristics whereby customers are not necessarily able to purchase from just any source. Wholesalers frequently have customers buying a reasonably stable range of products, meaning that resellers, builders and manufacturers tend to stick with suppliers with whom they have long established trading relationships.

On the price front, it is apparent that domestic softwood timber prices tend to be held in check by imported timber prices, but the reverse is also true. Sustained low domestic framing prices means that it is difficult to attract overseas producers to supply into Australia. 

Whilst the softening Australian dollar over the past two to three years has not been a major factor, the rebound of supply into ‘traditional‘ Northern Hemisphere markets for suppliers now also servicing Australia is an issue. It is not always that easy to get overseas suppliers to produce for Australian customers, as sizes and grades are different, and currently the prices paid by Australian importers are lower than some other markets, in particular the United States of America.

fig17

Importers having to cope with increased Northern Hemisphere demand also have to maintain price equity in Australia, so they need to be particularly attentive to transport and logistics efficiencies in an effort to try and maintain reasonable margins. It can be a high risk gamble for importers if market demand or prices drop, so importers generally take a conservative approach to buying additional stock.

However, beneath the macro level some variations are apparent. For example, grade quality and price escalation of Western Red Cedar (WRC) imports have seen substantial reductions in imports. Although, it should be noted that products like windows, door and plantation shutters, previously manufactured in Australia from imported WRC, are now imported (from China). 

Some of Australia’s tradition supply sources, like New Zealand, are experiencing increased domestic demand and are able to achieve much greater returns supplying their own market. However, they are now also competing with their own fibre, as timber and log exports to Vietnam, China, Malaysia and Indonesia are being value added and finished products are exported to countries including Australia.

Changing product demand

A notable factor, particularly with traditional structural timber products, is the apparent continuing shift in timber product type demand driven in part by offsite manufacturing; the import of prefabricated building components, and increased emphasis on engineered wood products (EWPs) like LVL, plywood and CLT. This trend may exacerbate the weakness in more traditional softwood structural product markets.

The domestic softwood supply situation may currently be at capacity, but the apparently impending closure of the Carter Holt Harvey Morwell softwood sawmill, coupled with the protracted lock out at the company’s plywood mill at Myrtleford will impact on this supply capability. In addition, concerns related to projections of a shortening log supply are also troubling. 

fig18

To go straight to the dashboard and take a closer look at the data, click here.

Domestic supply tensions

Longer term, ongoing softwood log supplies from industrial plantation growers will be challenging. The need for additional new planting and a shortening of plantation rotation lengths to boost log supply are matters currently needing serious consideration. Presently the South West NSW log supply zone centred on Tumut is ‘borrowing’ about a million cubic metres of logs a year from outside the region to maintain present production levels of sawmills and pulp and paper manufacturing facilities in the region. 

These concerns are further exacerbated by planned new softwood-based processing initiatives, such as the Borg particle mill at Oberon in NSW and the X-Lam CLT manufacturing facility in Albury, NSW. Both these facilitates will require fibre and/or timber supplies.

Summary

Looking forward, ongoing softwood timber supply will be impacted by:

  • Likely softening of building and construction activity over the short term. However, population growth and housing shortages are likely to mean residential building and construction will continue at or above 200,000 housing starts a year in the medium term.
  • Continuing changes to the nature of residential housing, as the move from detached houses to apartments in major metropolitan centres gains further momentum.
  • Changes to softwood timber product type demand will be influenced by greater prefabrication of building components, offsite manufacturing, and demand for EWPs.
  • Medium term concerns related to the maintenance of present levels of domestic softwood timber supply levels, and log availability will impact on the supply chain.
  • Import volumes of structural timber will remain restrained while domestic prices remain lower than other world markets. A lift in prices is likely to attract increased supply.
  • Continuation of a conservative approach to inventory levels and prices. It is probable that imported softwood volumes will grow in the medium term with a particular emphasis on EWPs.
  • Within apparent domestic and import macro volume and price data there are exceptions, such as the decline in demand for WRC and a strong growth in demand for imported EWPs.

 

Posted Date: July 4, 2017

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