Sawmills to endure more pain as exporters contend with shrinking margins, cheaper rivals
New Zealand timber companies, who have closed more than 40 sawmills in the past decade, are likely to face more pain as plants tied to the export trade face lower-cost Chinese mills, rising competition and a high kiwi dollar shrinking margins.
Sawmills supplying timber to the New Zealand market, including Graeme Hart's Carter Holt Harvey Woodproducts (NZ) and the Verry family's Red Stag Timber are benefiting from a revival in housing construction in Auckland and Christchurch but the outlook for exporters remains shaky, according to Rotorua-based forestry consultancy DANA.
"The sawmilling industry is still not out of the woods," DANA director Dennis Neilson told BusinessDesk. "The New Zealand domestic market seems to be going quite well. Where the struggle continues to be is where mills are focused on exports."
The environment is improving for sawmills selling product into New Zealand as consents for new dwellings accelerated at a 21,300 annual pace last year from 29,900 a decade ago and a low of 13,700 in 2011, according to Statistics New Zealand.
While an expanding Chinese economy has driven a surge in the volume and price of New Zealand raw log exports, local mills haven't been able to compete with more efficient, low-cost Chinese sawmills that cut up logs for temporary construction lumber. Instead, kiwi firms are competing with Chile to supply higher-value kiln dried wood to meet increased demand for furniture such as baby cots.
Signs are emerging that demand may soften in China as inventory starts to build up on Chinese log ports over the past few months and credit availability tightens amid uncertainty about financial stability and bond defaults, Neilson said. The weaker sawmilling industry would be hit harder by falling prices than log exporters who have enjoyed robust returns in recent years.
New Zealand's export-focused sawmills are also facing weak demand and increased rivalry in other markets as a result of soft housing construction in the US, where New Zealand supplies decorative mouldings, and a depressed housing market and increased rivalry in Australia.
Tenon, the NZX-listed company that sells wood mouldings in the US, broke even on a net basis in the six months to Dec. 31, saying in February that there were some signs of recovery in the North American housing market.
While a survey of mill owners late last year showed some "tentative new optimism" that the worst may be over, continuing China log demand and rising prices may bet temper that optimism this year, DANA said in its 2014 New Zealand Forest Products Industry Review.
"The industry has been affected by high exchange rates and very competitive export price trends in recent years, and so has not been able to 'add value' to its lumber exports this decade - in fact the reverse is true," DANA said. "This seems to be an alarming trend and doesn't bode well for the general economic survival of much of the New Zealand sawmilling industry, unless this trend is reversed."
Last month, Southern Cross Forest Products, which had three mills in the South Island and one in the North Island, went into receivership. Of its South Island mills, around 95 percent of lumber produced went to export markets, DANA said.
New Zealand production of sawn timber has dropped 11 percent to an annual 3.97 million cubic metres in the past decade, according to figures from the Ministry for Primary Industries.
New Zealand's sawmill industry is facing increasing competition for logs because of the "insatiable demand" and higher prices from export markets, especially China, DANA says. New Zealand overtook Russia as the largest exporter of logs to China last year.
"The recent significant increase of New Zealand's log exports to China has had relatively little impact on the demand for our lumber in that market, but has had the reverse impact by raising sawlog input prices for New Zealand mills trying to not only compete in that market, but others also."
New Zealand wood processing plants are less competitive than those of our international rivals in Chile, Canada and China, DANA says. Some small family-owned high-cost sawmilling companies were operating long past when they should have closed, it said.
The importance of Australia as an export market for sawn timber has faded after a change in Australian standards favoured Australian wood types, making it harder for New Zealand mills to supply large volumes, DANA says.
While New Zealand remains Australia's largest import market for sawn wood, volumes have fallen 40 percent to 259,000 cubic metres in the past nine years, according to the latest figures for the March/June quarters of 2013, published by the Australian Government Department of Agriculture.
New Zealand exporters into Australia are also facing increased competition from Finland's Stora Ensa, DANA said.