Thanks to a strong dollar and a global surplus of stock, the timber industry in Australia is being swamped with imports from overseas even as demand slumps amid weak conditions in residential construction, a leading economic forecasting firm says.
Despite that news, the long-term future for manufacturers looks good as anticipated levels of supply are not expected to keep pace with domestic demand.
In its latest report, Sawn Timber in Australia 2012 to 2026, industry research firm BIS Shrapnel says that the volume of timber imports into Australia increased by 30 per cent in the two years to 2011.
The report, which analyses differences in the hardwood and softwood sawn timber sectors based on a survey of builders, end users and other merchants, finds that Australian producers are facing increased pressure from imports thanks to a global surplus of timber following the GFC. This is the case even as domestic producers have sufficient capacity to supply much of the domestic market.
BIS believes that even as building conditions remain soft, competition from imports will continue to present challenges for domestic manufacturers into 2013 – good news for builders who will benefit from price competition, but not so good for the timber industry itself.
Still, the report is not all bad news for manufacturers.
Put in a longer-term context, volumes of imported product are lower than they were 20 years ago, and the last two decades have seen a significant reduction in timber imports as domestic production capacity has grown.
Furthermore, the impact of competition from imports has been largely nullified by exports, for which BIS says volumes have grown rapidly over the past five years.
Moreover, from the viewpoint of manufacturers, the longer-term outlook is promising.
By 2014, BIS says, both global and domestic market conditions will be more favourable to producers as the dollar declines and worldwide demand picks up amid an improving US housing market and strong demand in Asia.
Looking even further out, BIS reckons an undersupply of residential dwellings will fuel local demand over the next decade, with particularly strong conditions expected in both 2014 and 2015.
As a result, BIS Shrapnel report author and senior manager Bernie Neufeld says anticipated levels of sawn timber production will not be sufficient to meet demand.
Average annual domestic demand for sawn timber is expected to increase from 4.9 million cubic metres to 5.4 million cubic metres between now and 2015; by 2126, BIS reckons this will rise to 5.7 million cubic metres.
By contrast, production will range between 4.5 million cubic metres to 5.2 million cubic metres over that time – not enough to meet projected demand.
“Unless domestic capacity is significantly increased to meet projected demand then imports will likely rise again over the long term,” Neufeld says. “This suggests the Australian industry has the potential to accommodate new mills to service the domestic market and potential export markets. There is a need to expand the plantation resource to allow this to happen.”
Hardwood or Softwood?
Conditions vary between the two main segments of the market.
Subject to constraints arising out of community pressures and government legislation, both production of and demand for hardwood has dropped by almost half over the last decade, with further declines of between seven and 12 per cent expected between now and 2016.
That said, BIS says, domestic prices will face upward pressure due to limitations on supply and rising import prices.
In contrast, thanks to a combination of industry consolidation and government-initiated plantation programs which have supported the development of modern saw mill operations, local softwood players are now in a more competitive position than they have been in previous decades.
Furthermore, BIS expects prices to rise as demand of five million cubic metres in 2026 (up from 4.2 million cubic metres in 2012) outstrips anticipated production of 4.6 million cubic metres.
“There will still be a requirement for imports, and a constraint on exports, unless the plantation resource and industry capacity is increased,” Neufeld says. “Strong demand and limited supply suggest strong price growth.”