An opinion piece on understanding New Zealand’s Wood Supply Crisis - by Julien Leys.
The recent crisis around the shortage of structural wood has highlighted several vulnerabilities in New Zealand’s building supply chain. The irony of apparently running out of wood goes beyond just the unfortunate timing only days after the Government’s major Housing announcement to build more homes. Rather it also highlights New Zealand’s lack of national investment in wood manufacturing capacity combined with record levels of domestic demand as well as a boom of log exports never seen before.
It is now the ‘excuse du jour’ to point most problems to COVID-driven instability. Yet in the case of New Zealand’s structural timber shortage this would mean not seeing (pun fully intended) ‘the wood for the trees’. The true story is far more complicated and multi factorial than just blaming the Pandemic.
Carter Holt Harvey (CHH) is one of New Zealand’s largest processors, manufacturers and suppliers of wood products. However, it is not, unlike many of the other sawmills around the country, an exporter of logs. What has not been reported widely in media is that CHH Wood Products Division has also invested $100M since 2020 in increasing efficiency in its key plants in Kawerau and Nelson to boost its manufacturing capacity by 40%. Moreover, CHH only closed its Whangarei plant in 2020 because the Northland region no longer has any more structural graded timber to make the sawmill economically viable. Closure of the Whangarei plant has been planned for many years, so despite the unfortunate job losses, it had no impact on CHH’s manufacturing capacity or the structural timber supply for domestic housing.
Importantly, New Zealand’s structural wood supply crisis also pre-dated by several months CHHs sudden announcement last week to cut 10% of its supply to its ITM and Mitre10 customers. ITM will now be ruing its decision to not commit to CHH’s offer of a wood supply agreement – the extra capacity was instead taken up by trade leader Placemakers whose structural wood supply is uninterrupted. However, two thirds of ITMs wood supply is from other sawmills and so unaffected. The total shortage of structural wood in the New Zealand building supply chain is approximately 5% -10% - not ideal in the middle of a housing boom.
The supply of wood to meet New Zealand’s domestic demand has been under immense pressure since 2019 / 2020 based on rising consumer / trade demand and log prices. Pandemic Lockdowns, and in particular closed borders to travel, stimulated a historic level of demand for domestic building across the supply chain from DIY weekend warriors upgrading bathrooms and kitchens to major renovations and playing catch up on the shortage of 40,000 homes for New Zealanders looking for affordable accommodation.
The New Zealand housing boom defied the gloomy economic forecasts which were based upon the analysis of stable data patterns. The forecasts were thus unable to interpret the fast moving and disruptive variables arising from the global pandemic combined with Governments financial stimuli and Banks low interest rates. Not surprisingly, very few countries including New Zealand managed to successfully plan for the tremendous upswing in consumer housing demand that followed the viral curveball that turned all societal and economic norms upside down.
The New Zealand building supply chain for structural wood also choked on the unseen level of housing demand because many sawmills decided to sell all of their current timber stockpiles while dialling down production capacity based on the gloomy economic forecasts. Sawmills run efficiently, like most heavy industries, when maintained consistently at full production. Ramping up production capacity back up takes several weeks or months to achieve and so New Zealand’s shortage of structural building wood is likely to last until June 2021 until supplies catch up with demand combined with a Winter seasonal slowdown.
Unfortunately, the solution to New Zealand’s wood shortage is not simple. For example, we cannot import timber from other markets as most other countries have also experienced a similar housing boom. Moreover, only imported wood that meets the Building Code and NZ Standards (NZS 3604 (2011)) can be approved by Building Consent Authorities for use in the construction of structural buildings. Some critics have argued that New Zealand’s Building Code in effect stifles competition in the wood industry by preventing imports including use of untreated timber. However, this is a falsehood as our standards are designed to ensure New Zealand does not repeat the catastrophic era of leaky homes, which is still being counted financially by tens of thousands of homeowners today.
The other variable in this ‘prefect storm’ for the building supply chain, is New Zealand’s 2019 Upgrade to its China Free Trade Agreement (FTA) which meant improved access for New Zealand’s wood processing sector. In practice this FTA Upgrade now allows for tariff-free entry for almost all of New Zealand’s $3Bn wood and paper trade to China, and phased tariff elimination on additional wood and paper products worth NZ$35m.
However, the flip side is that China’s appetite for New Zealand’s wood has risen dramatically not just for pulp, but also structural graded logs used for building houses. Forestry exports are now worth almost $7 billion a year and are New Zealand's third-largest export earner behind dairy and meat. For largely geopolitical reasons China has decided to bypass Australian timber suppliers and so New Zealand logs are fetching historic record prices. Not surprisingly, many sawmills like Rotorua’s Red Stag are exporting structural timber overseas for premium prices and this is reducing the domestic wood supply.
While this wood supply issue typifies the uncertainty of a world struggling to manage the ripple effects of the Pandemic, its unintended consequences are the very real impact on New Zealand’s small builders who may be unable to start or finish new home builds or renovations. Perhaps we will realise that investing consistently in increased wood production capacity needs to be matched to long-term procurement contracts from Government for the building supply chain irrespective of whatever the crystal ball economic forecasts say.