Soaring timber prices come as welcome news for exporters, but local mills, builders and ultimately consumers are starting to feel the pinch.
At the beginning of this pandemic, the construction sector was bracing itself for a bleak future. But a year on, it’s in the starkly different position, doing even better than before Covid.
Prefab NZ chief executive Scott Fisher says the construction boom has come as a “surprise”.
Last month’s GDP figures for the first quarter showed the economy had done exceedingly well because of strong growth in the construction sector (up 6.6 percent), particularly in residential building.
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Economists have attributed this to people being unable to travel, savings being poured into renovations and returning expats looking to build homes.
Overseas, the United States and China, our biggest buyer of timber, have also invested heavily into revving up their construction sectors.
But add to this, shipping delays and you have a perfect storm for “skyrocketing” prices of raw materials, Fisher says.
A classic supply/demand problem. Timber framing is the most common material in residential construction and prices for the raw material are soaring.
Export prices for logs rose 9.1 percent over the March quarter to reach the highest prices on record, Stats NZ data shows. In the first two months of 2021, exports in forestry products increased by 27 percen to reach just over 3 million metres cubed, surpassing 2019 volumes.
“It feels a bit like we’re digging a hole for ourselves. We just can’t get materials and finish up as we go. It’s probably going to get worse before it gets better.”
– Simon Hinds, builder
A-grade logs cost about US$170/JAS (Japanese Agricultural Standard is the standard measurement of log exports) according to PF Olsen, much higher than last year’s June peak of US$161/JAS.
Kiwibank senior economist Jeremy Couchman says forest owners are sending more logs to China due to increased demand and it makes sense for them to optimise returns on their exports.
But that means locals are paying international prices for raw materials.
Couchman says the global challenge to find raw materials will come through inflation figures in upcoming quarters.
“The situation’s a bit worrying because with all the ports being clogged around the world, we might see this trend continue for another year,” Couchman says.
Builder Simon Hinds is currently working on delivering seven prefabricated houses by October but had a backlog of orders to keep him busy for the next 18 months.
“It feels a bit like we’re digging a hole for ourselves,” Hinds says.
Prices have gone up by about 15 percent to 18 percent across the board for materials, and quotes increase every week, he says.
Hinds says difficulties in sourcing timber are pushing delivery times for prefabricated houses from 17 weeks pre-Covid average to 25 weeks for a 250 square metre house.
“We just can’t get materials and finish up as we go,” Hinds says.
“It’s probably going to get worse before it gets better.”
And to add to the increased prices of raw materials, particularly timber and steel, there has also been a shortage of labour due to closed borders.
Hinds has 11 workers at the moment but is struggling to find just three more experienced workers to join his team.
Sawmills are also feeling the pressure of the demand.
Southern Pine Products chief executive Tom Whitefield says in his 30 year career he has never seen demand surging like it has this year.
“We want the government to stop allowing one country to set the price here for artificially inflated prices of logs. If a company did this it would be considered anti-competitive behaviour.”
– Jon Tanner, Wood Processors and Manufacturers Association
The company operates a saw mill on the West Coast of the South Island, typically processing 250,000 logs per year. But demand for construction materials means its had to increase processing by 15 percent.
He says increased demand has stretched timber processing facilities, with mills reaching full capacity.
What hasn’t helped the situation is the progressive closures of mills around the country over the past 15 or so years.
Last year Carter Holt Harvey closed its saw mill in Whangārei, and last month Norske Skog closed its mill in Kawerau.
The Wood Processors and Manufacturers Association chief executive Jon Tanner says New Zealand’s reliance on China has created an unfair environment for local manufacturers.
He claims China is artificially driving up prices, against the World Trade Organisation (WTO) rules, and the government needs to take action.
Tanner alleges China generously subsidises its wood processing industry allowing them to pay an artificially high price for our logs then process them offshore to on-sell as higher value products.
“We want the government to stop allowing one country to set the price here for artificially inflated prices of logs. If a company did this it would be considered anti-competitive behaviour,” Tanner says.
Trade Minister Damien O’Connor has been approached for comment.
But AUT construction management professor John Tookey says there is some effort from the government to boost the local timber industry.
Last month Building and Construction Minister Poto Williams and Forestry Minister Stuart Nash announced a new procurement guide to reduce carbon emissions generated by construction of new buildings
It also reflected the government’s goal to transition to a carbon neutral public service.
Tookey says the effort to increase the amount of timber in the construction has to be seen as a positive thing for reducing carbon emissions and also reinforcing Treaty settlements as many forests are owned by iwi.
However, he says there are intrinsic issues with perceived value particularly steel vs timber.
“It is not the use of a single material, be it timber, steel or concrete, that will lead to reduced carbon emissions. It is the overall lifetime carbon emissions of the building.”
– Nick Collins, Metals NZ
Minister Nash faced backlash for his comments that anything that can be built out of steel could also be built with timber.
Metals NZ chief executive Nick Collins reckons this “timber first policy” is favouring one industry over another.
Collins says under a “wood first” strategy, buildings will be considerably more expensive and delivery likely to be significantly delayed till timber is available due to the timber shortage.
“The wood sector assures us that it is a short-term issue, but there are significant lumber shortages in the US and Europe – with China setting the price for New Zealand logs.
“New Zealand needs to move quickly to address the challenges of climate change. But it is not the use of a single material, be it timber, steel or concrete, that will lead to reduced carbon emissions. It is the overall lifetime carbon emissions of the building.”
For the meantime the construction industry is continuing to truck along.
Hinds says the lesson to take away is how reliant New Zealand has been on overseas products.
“But we’re just such a little country, we have to rely on overseas products. That’s just the way it is with everything going on.
“We’re so busy right now, we’re just going to have to keep going until it eventually settles down.”