The current shortage of framing timber in New Zealand is a result of a global phenomenon compounded by unfortunate timing for New Zealand's largest supplier Carter Holt Harvey (CHH).
A year ago, the construction industry was at the top of the cycle. Sawmillers, like any manufacturers, invest 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 the bach, 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, 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. Take for example, the construction of the Southern Hemisphere's largest sawmill in Rotorua. It produces over 600,000 cubic meters of timber annually and supplies 25 per cent of the
New Zealand framing market.
CHH owned the second, third and fourth largest sawmills based in Kawerau, Whangarei and Nelson respectively, with around 45 per cent market share. 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 Kawerau 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 Kawerau 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. I expect it will in due course; these things can take some time.
With the benefit of hindsight, it would have been better to await the successful Kawerau upgrade before closing the Whangarei mill this time last year.
All this has 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. Something had to give. The surprising move came on Tuesday last week when ITM, Mitre10 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. Which in turn means it will be business as usual for much of the industry.
Options from here
My estimate is that there is a shortage of 5-10 per cent currently in New Zealand. 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 5-10 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 1 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 Kawerau 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 the new Cross Laminated Timber (CLT) factory in Rotorua, which will open in May. The Red Stag factory has the capacity to supply 2,000 apartment units annually, so around 5 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 3 storeys and above. It forecasts building hundreds of dwelling units annually with the product, yet it makes up only a portion of its build programme.
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.
- Marty Verry is the chief executive Red Stag group.