It’s the main issue of 2021. I asked leaders across the industry to describe where we’re at, how we got here, and what we can do next when it comes to supply. by Donyale Harrison
Not every timber product is in short supply right now, but the impacts of those that are hard to get or have soaring prices are being felt across the industry.
I spoke with Simon Dorries, CEO of Responsible Wood, Jason Ross, marketing and communications officer at Responsible Wood, Shane Vicary, CEO of AKD Softwoods and Adrian Woodcock, sales director Asia for Metsä Group about their insights into the current situation. While Covid and schedules meant we weren’t able to sit down together, the following edited transcript of our discussions helps explain what’s going on and what it means for us in the near future.
What’s going on?
Simon Dorries: I started as a cadet scientist in 1985, so I’ve been in the industry for 36 years, which is a long time. In my wildest imagination, I could have never seen the situation we’re in now. It’s always been the case that short term wood shortages could be backfilled by a quick reaction from global supply chains.
A good example would be the 1999 pre-GST shortage. Demand went through the roof because everyone was building kitchens and houses before the GST came in. But that demand was satisfied by local manufacturers ramping up production and increased import volume. In the current circumstances, we have the perfect storm. Domestic production is curtailed as a result of the fires, though the fire impact hasn’t really even hit yet as they’ve only just stopped the salvage harvesting in the last couple of months.
Jason Ross: Salvage might have actually improved supply in the short term.
Dorries: True, I was down in the Tumut/Tumbarumba area at this time last year and I’ve never seen so many logs in log yards ever, all burnt. But that’s now finished. Where, in the past, we’ve gone to global supply chains, now US timber prices have soared, anywhere from 200-400%. In part, that’s driven by the US Federal Government stimulus, but also the Canadians have reduced their volumes, which I think has probably triggered the supply shortages in the US, which in turn has curtailed global supply chains to put more product into the US and is ultimately starving Australia. What people are willing to pay hasn’t gone up as much in Australia, so global suppliers will put their product in the market that gives them the best return.
Shane Vicary: We’re flat out. We’re producing as much timber as we possibly can. I’ve never experienced a market dynamic like this. Two or three things have all happened at the same time. The first is that we’ve got surging demand and constrained supply. It’s creating an almost toilet paper-type stressor – there’s a degree of panic about the fact that there’s a feeling of a lack of supply.
If you talk to the big frame and truss companies, most of them are doing their traditional volumes: they just can’t get extra volume to do more. The merchants and frame and truss companies that have traditionally bought imported wood or have shopped their supply on a regular basis are the ones who are struggling, because they’ve traditionally focused on price and their buying principles have been based around price and now they’re unable to get that cheap supply from overseas. The companies that have respected domestic supply chains and their security are the ones that are benefiting today.
Adrian Woodcock: Metsä is the second-biggest supplier of LVL in the world and we’ve moved strongly into the Australian market in recent years, but we’re still not filling the gap that Carter Holt Harvey left when they pulled out. They supplied something like 60 to 70,000m3 here, and that volume has never been filled.
Add to that the government grants and new homeowners wanting to buy and the market has got extremely busy just as one of the biggest suppliers has withdrawn. On top of that again, the American market is on fire and paying premium prices, so the American producers are quite happy to stay at home and they’re not looking to export into Australia. Plus shipping delays have blown out. It used to take us 6-8 weeks to ship out of Helsinki into Australia, we’re now more often 12-15 weeks. It’s a mess, there’s no other way to describe it.
Vicary: The other thing about America compared to Australia is that, for a European producer it’s 10 days’ shipping compared to at least 30, and it’s also really simple, across the Atlantic, whereas shipping from Europe to Australia is through the Suez Canal, around Singapore… It’s complex and complicated and global shipping routes have been fundamentally challenged with Covid.
Dorries: I was talking to one of the big European wood product manufacturers and they were saying that every possible container is being filled with wood and sent to the US and they’re actually starving their local market and importing wood from Russia to supply their local market and sending their own wood to the US.
Ross: That’s a challenge to us with Responsible Wood and PEFC certification as well. It’s much harder to ensure proper certifications when people are buying from new suppliers in haste.
Dorries: Plywood’s not quite as bad as LVL, but cheap plywood is impossible to get.
Woodcock: It’s probably the worst I’ve ever seen. We have our set customers here in Australia that we’re trying to service. I would get six to eight emails a day from people desperate for anything and I have nothing for them, which is just unheard of.
We’ve got an offer on the table to supply LVL to the new quarantine hub in Victoria and we’re having to try to squeeze the supply for it. The Federal government is telling everyone they’re going to have this thing built by Christmas, but I don’t know what they’re going to build it out of.
Our mill is at the highest volumes it’s ever been at in the history of Metsä and we’re running it 24 hours a day, 7 days a week. We’re up around 300,000m3, but it comes back to allocations. We all put our allocations for this year in last September and no one knew this was going to happen. It’s just an unbelievably crazy time. Effectively, we’re sold out till the end of 2022. And because there’s no timber now, it’s just slowed down the whole process, so things are going to be busy through to the end of next year at least.
Fluctuating economics
Vicary: The reality is that importers play on a global stage, so they move their fibre to where they can get the best bang for their buck and at the moment that means meeting this huge demand surge in America.
That said, we talk about demand and supply, but for sawmillers like AKD, while we’ve been going flat out since October last year, I shut a mill in April last year because customers were not committing on volumes and were trying to push on price.
I’ve re-opened it, but I confess I have less sympathy than I might because the same people crying loudest about supply now were the ones pushing my prices down in 2019. It rips profitability away from us at the bottom part of the cycle. We get called gougers if we do that at the top part of the cycle, and it has the same adverse set of effects for suppliers when prices are pushed artificially low as it does for retailers and builders when they’re as high as they are now.
Woodcock: Australia uses some 320,000m3 a year of LVL products. Wesbeam is the only local manufacturer and they represent about a fifth of that, the rest is import. CHH left a big hole and no one was prepared production-wise or shipping-wise to pick that up. And it wasn’t with a lot of warning. I’m not blaming them by any stretch, they had their reasons for pulling out and those make good business sense. So they’ve gone back to NZ and they supply their 120 CHH stores, it’s a very clever business move.
The impacts of these high prices will force a lot of builders to go broke because they wouldn’t have predicted them when they were quoting for houses 12-18 months ago. It’s a catch-22.
Dorries: Many builders have fixed-price contracts. My daughter is building a house at the moment and she has a fixed price contract, so there’s no opportunity to pass these raised costs on and, worse, they’ve got a guaranteed delivery date. For every week past the delivery date, they’re going to pay her rent. The timber was seven or eight weeks late, so they’re already roughly two months behind schedule. They may be able to catch up, but that will depend on the other trades. There’s a very real chance that builder will be paying her rent for a few weeks.
Ross: I was talking to some major house developers over the weekend and an additional issue they face from the land developers is, because land is so hot at the moment, they’re being coerced into 90-day put and call options on the land. So in order to market the land, they need to actually settle on the land, regardless of whether they have a contract or not. That accentuates the challenges they face from materials shortages: they’re getting hit from both ends!
Vicary: I’ve got a lot of builder friends. It’s a big part of our economy, so these issues are affecting a lot of people. It should be a good time for the average residential builder with low interest rates, HomeBuilder and fewer people wanting to live in apartments now thanks to lockdowns and Covid risks, it’s created this enormous demand.
And we focus on cheap debt, but one side effect of interest rates being so low is there’s no incentive for people to put their money into term deposits. Let’s say you inherit a million dollars. You can’t easily put it into your Super, because you’ve got your contribution cap. If you put it into a term deposit, you’ll get no interest. If you invest it in a portfolio of shares, it’s a gamble, and you’re already exposed to the equities market through Super. But housing growth in Australia has been seen as almost a surer bet than putting money in a term deposit.
So there are a lot of people out there who think they have nowhere else to put money at the same time as they’ve been sitting at home not spending money for 18 months.
Ross: Another thing to consider are the logistics challenges. We have anecdotal evidence of empty shipping containers banking up in different countries thanks to the disruptions of Covid.
Dorries: We haven’t yet seen significant problems with certification and compliance, but I think if I was a builder and I was under pressure because I’ve got angry customers, I’ve got a fixed price contract and I’ve got a due date where I’ll have to pay someone’s rent, if someone offers me any sort of wood product – even if it might be a bit dodgy – if I can get away with it, I’d use it, because the ramifications for not using it are worse. It’s an environment that will favour either non-compliant materials or materials with poor-quality certification, which may undo a lot of the gains we’ve made in differentiating timber as a safe, reliable product.
Building suppliers would have to be doing it tough, too. The market is hot, but they haven’t got the volume to supply. I guarantee that many of them will be chiselling their margins, because when their own suppliers have put their prices up, they haven’t been able to pass on the full increase. And then there are some interesting other factors: a couple of the local manufacturers have either not increased prices or only increased them marginally just to teach the importers a bit of a lesson – it’s an interesting tactic.
Political pressures
Vicary: The China ban has actually come at a really good time, as we are able to purchase logs that would normally be exported. Sawmillers would not normally get the opportunity to buy these logs. While they are an inferior quality and don’t produce the same quantity or quality of structural lumber, it is better to have this supply source.
A question I have been asked, is ‘why don’t the sawmills just produce more timber?’ but the infrastructure to harvest even more logs, truck those logs and run the sawmills even more is simply not available. I believe we are at our nation’s maximum historic timber product levels.
Sawmills have typically been operating 20 hours a day, 5-6 days a week, they can’t be 24/7 as we need maintenance time.
Finally, I have been asked about exporting timber to the US, AKD has not exported any timber to the US, and I don’t know of any of our softwood sawmill competitors exporting structural timber either.
Looking closer to home, the government stimulus was awesome in the way it restarted the economy. But it has created this massive surge.
Woodcock: Our customer base in Australia have all pretty much doubled or tripled their order expectations this year, thanks largely to HomeBuilder. It’s like the pink batts scheme again, when no one bothered to check whether there were the batts or qualified installers to do the job.
On one level it’s worked, interest rates are still low and unemployment is heading south again, so if you were ever going to buy a house, you’d buy a house now. But unfortunately, there’s not the labour or materials to go with the expectations or the growth. And I don’t see anything much changing till the end of 2022.
Even if suppliers like Metsä start putting in new lines right now, it’s two to four years of lag time to go through the process of ordering and building the plant that would let us increase our production, and it’s hundreds of millions of dollars to build.
Wesbeam is the only Australian LVL producer and it’s delivering great product. I’m Australian and I love to see Australian producers, but the fact is unless it spends massively on expansion, it’s never going to fill the hole CHH left in the Australian market.
The lower-end estimate of that hole is 60,000m3 and that’s about 1500 30-foot containers – which is not just a drop in the ocean. Inadvertently, what CHH leaving Australia has done is to push LVL prices back up to where they should have been.
We’re our own worst enemies here, because we have a tradition of trying to push down retail costs, which has resulted in the sector continually screwing the price of LVL down and down until CHH said ‘You know, we’re just not making money in Australia, we’re out of here.’
When they left, everybody ran around going ‘what happened? What happened!?’ Well, you caused this. How LVL ever got turned into a commodity line is beyond me, but that’s where we are, and where we’ll probably stay for a while with LVL, unless CHH comes back, which is unlikely given how good New Zealand is as a market now.
What’s next?
Vicary: We’re seeing people looking at alternatives to LVL and AKD is trying to feed that. I think there’s an opportunity there. We need to get the message out to detailers, frame and truss and architects. Some of them are already pushing back towards these other products, which is good.
Those sorts of changes really come down to the sawmilling companies putting pressure down the supply chain back to the architects with span tables, and that’s all information that’s readily available. There’s a lot of pressure on the architects and designers to come back and say ‘this is what the potential solutions are.’
There’s always an unintended consequence of any activity but one of the unintended consequences of cutting more wides to offset the lack of LVL is that you cut fewer narrows, and then you have less stick framing.
WoodSolutions and FWPA have done a lot of good work in this space ensuring that detailers and architects are armed with good information. There’s been a lot of work recently in the multi-res space around how they can use timber for multi-level solutions. Unfortunately, that’s been heavily based around glulam and LVL, but you can use solid timber in some applications.
Woodcock: There’s been investment here in CLT and glulam rather than LVL, and the offsite construction that they’re designed to meet demand for will take off at some stage, but we’re a long way behind Europe and North America. There’s some big investment going in there: TimberLink is investing some $200 million into it. If they think they’re going to create the market, I wish them the best of luck.
As for LVL, it’s such a difficult product to manufacture, that’s why it’s so costly to do it. And you need resource: there’s no point building a new $100 million state of the art plant without the trees to put in it.
Maybe what comes out of this is that people finally realise the real value of good LVL and stop trying to push the price down.
Globally, Metsä has had a very profitable year. But in Australia, this year’s pencilled-in price increases are only returning to the price levels of three to five years ago. We need to make certain there’s profitability across the sector if there’s going to be future investment or, indeed any long term future, and that’s particularly important for companies that don’t have the global reach of ones like Metsä.
Dorries: Domestic producers are ramping up production as much as they can, but there will still be holes. If the question is what we do in the meantime, I don’t know. Builders are at the point now where they’re starting to substitute materials, including going to steel, but there’s a shortage of steel framing as well. In the bigger picture, whoever’s supply chain gets their ducks in a row first will probably win the race.
If this global timber shortage continues for some time and steel becomes readily available in the market in a short space of time, then there’ll be a migration to steel framing. It’s a risk to the market. The question is, who resolves the issues first?
Ross: The steel industry has a lot more consolidation in their supply chain, and that represents a real challenge to us.
Dorries: And the HIA is still calling for stimulus, even though it’s not something members can supply. So we go back to fundamental supply. At the moment, demand is bending supply, so that price goes up and that creates a market for substitution. If you cannot substitute, then the lead times are just going to get longer and you’re going to have a lot of frustrated people. But getting product from global supply chains is going to be disrupted and will be disrupted for some time.
Ross: Not wanting to add to the bad news, but there’s the European issue with beetle infestation and the same in Canada. The last statistic I heard is that, globally, there’s a 3% supply shortfall. That doesn’t sound like much, but when you work it out in cubic metres, it’s huge.
And the challenge for us in that is that all that import/export supply will go to the markets that can pay the most.
Dorries: Prices are not going to be returning to a level of stability in the short term, and more importantly, I think some of these increases are here to stay.
Ross: One good thing that has come out of current issues is that people who had previously done what they’d always done are now looking for other options and they’re getting support in finding new methodologies through everyone from their suppliers, to industry organisations, and in particular, WoodSolutions and FWPA, whose educational content is really showing its worth right now.
For more, visit www.akd.com.au, www.metsawood.com and www.responsiblewood.org.au
Image: LVL is a highly specialised product with specific manufacturing requirements to produce its engineering qualities. Plants like Metsä Group’s don’t come cheap and take years to build.
