Builders say the supply crisis has eased for many critical products – but now they face a plummeting demand crisis that threatens to drive more of them to the wall
Suppliers ITM and Mitre 10 say they're being squeezed by the timber company Carter Holt Harvey allocating structural timber to its own retail outlets by preference.
It's a last, inexplicable residue of a supply crisis that had caused building sites to grind to a halt. The two independent merchant chains are caught between the big producers – which have largely addressed shortages of plasterboard, ply and steel – and construction companies.
"The last 18 months or so have provided a real-life example where our individual independent merchants faced significant difficulties and dealings with the vertically integrated players, especially in terms of supply of structural timber – an absolutely essential bedrock product." – Darrin Hughes, ITM
The builders have, out of frustration at the past year's supply crisis, started going to alternative suppliers or directly importing the products they need from overseas – and that's left independent retailers vulnerable.
Last year, Carter Holt Harvey halted structural timber supply to some of its domestic customers while maintaining supply to its subsidiary Carters, to Fletcher Building’s PlaceMakers, and to the Chinese export market. Under fire from Prime Minister Jacinda Ardern, it promised the shortage of timber would be resolved within six months.
But, in a submission to a Commerce Commission inquiry into the dominance of a few big suppliers, ITM reveals that has now dragged out for 18 months.
Chief executive Darrin Hughes says: "ITM would ordinarily expect to have members’ combined volume as a decent negotiating lever, but for over 18 months now that foreclosure of input by Carter Holt Harvey has damaged competition by others trying to get product supply in enough volume to meeting builders’ demands.
"The last 18 months or so have provided a real-life example where our individual independent merchants faced significant difficulties and dealings with the vertically integrated players, especially in terms of supply of structural timber – an absolutely essential bedrock product in the industry."
ITM is a nationwide chain, comprising 91 independent building supplies stores operating under a cooperative umbrella. Mitre 10 is also a cooperative, with more than 350 stores.
Mitre 10's general counsel Grant Fraser told the Commerce Commission hearing there had been a "very similar" ordeal for Mitre 10 stores. "Our experience was pretty similar to ITM's in terms of the allocation models, the costs, the various suppliers or particularly those vertically integrated."
"It's definitely a concern ... There was an incident a couple of years ago where we did lose a customer and we were given price indications that suggested that it was below our cost price." – Darrin Hughes, ITM
In a hearing, the transcripts of which have now been published by the commission, Hughes said the impact of losing access to Carter Holt Harvey's structural timber was unlikely to be short-lived. Carter Holt does nationwide deals with high-volume customers that put ITM at a material disadvantage in obtaining frame and truss timber, he explained.
"It's definitely a concern," he said. "There was an incident a couple of years ago where we did lose a customer and we were given price indications that suggested that it was below our cost price but, again, we don't have any hard evidence to support that."
"As the commission is probably aware, the number of consented homes in New Zealand remains at all time high levels, even through this predicted time of recession – just under 51,000. The capacity to build sits somewhere below 40,000, so there remains a pipeline backlog in the market. So structural timber continues to remain in short supply.
"There has been some recent evidence of minor loosening from some mills but on the whole, it remains a constrained supply product for us."
ITM had told the commission that its outlets had difficulty getting access to structural timber, and that compromised their position in the merchant market. Carter Holt has an "allocation model" that ITM says favours the high-volume players – including its own Carters stores.
The Commerce Commission, in a draft report, highlighted the constrained supply of structural timber. Commissioner Dr John Small told the hearing: "We found that one of the allocation models that's being used, particularly the one by Carter Holt Harvey regarding structural timber, had the effect of preventing or making it more difficult for some merchant chains."
"It was our observation that in some of the very big projects, and possibly the customer that ITM lost, was that the incumbents who are vertically integrated are grooming their customer base." – Tex Edwards, Monopoly Watch
Small said the problem was not just the vertical integration of logging and milling company Carter Holt and its Carters retail outlet, because Fletchers and James Hardie also had allocation models that were competitively neutral.
Even before the Commerce Commission began its market study into building supplies, authorities had been concerned about Carter Holt giving preferential treatment to its own retailers. The country's biggest timber supplier was investigated for this in 2007 when it purchased the TDC Mill in Northland, but no enforcement action was taken after structural timber prices dropped.
In 2014, it was fined $1.85 million for price-fixing in the timber market in Auckland.
Then in March last year, the Commerce Commission promised to make enquiries into Carter Holt Harvey’s decision to halt structural timber supply to some of its customers. Carter Holt said it had a shortage of structural timber able to be produced through its mills.
That prompted Ardern to say ministers were "engaged" in looking into the problem, and what the Government could do to increase processing capacity. Carter Hold promised the issue would be resolved within six months.
Hughes said ITM had a number of questions from key and loyal customers as to whether ITM could sustain their business through that period, given media reports of Carter Holt cutting its timber supplies. They were also approached by dissatisfied customers from other merchants, but weren't able to supply them timber either.
"Now, again, we all accept the supply crisis being what it was. Nobody could take advantage, be it structural timber, be it plasterboard, whatever. What concerned us was the damage to our reputation and questions from core customers as to whether we could sustain our business."
"If the New Zealand Government, through its agency, said that is a perfectly acceptable product – a window, door, plasterboard, timber truss – then as long as that was open and transparent and public, that would be a good thing for the economy here." – Andrew Clarke, Fletcher Building
By contrast, he said, James Hardie and Fletcher Building used their allocation models for Gib and Pink Batts to ensure there was a fair and equitable distribution across the various merchants they supplied. "We didn't get enough of what we wanted but we were happy that we were treated fairly and communication and contact remained strong, as you would expect with a normal supplier-customer model."
The operation of their allocation models contrasted to the Carter Holt's allocation process, "which foreclosed supply on both ITM and a number of other merchants and retained supply to themselves and the other vertically integrated player, being PlaceMakers".
He said ITM stores loyal to Carter Holt for more than 20 years were told they would lose all timber supply overnight. "Communications were typically by phone call only, nothing was put in writing, and no negotiations were willing to be entertained by Carter Holt Harvey," he said.
"No attempt was made, that we could see, to develop a fair allocation model ... Carter Holt Harvey was then ITM’s largest supplier of structural timber, and ITM was a very significant customer ... Essentially, other merchants were cut off from supply, so they could service Carters and PlaceMakers stores.
"Anecdotal incidents took place where sales team reps (whether authorised or not) used this in local areas to disadvantage other merchant stores, telling builders that, for example, Carters had guaranteed timber supply and ITM didn’t, or that PlaceMakers stores can secure Gib six months ahead of competitors.
"It was common knowledge in the industry that some Carters stores were overstocked for months in timber, essentially stockpiling, yet no supply was available to ITM and others.
"It is possible to infer that Carter Holt Harvey intended to improve the position of its own merchants and that of another conglomerate upon whom its merchants depend for supply of different essential products," he concluded. "They somehow managed to free up volume to their own entities, and only eventually made some drip-feed volumes available to others after regulatory or media scrutiny."
Tex Edwards, from Monopoly Watch, said Mitre 10 and Bunnings were more consumer-facing businesses, which left ITM as a third player in the trade supply market.
"It's not just price that ITM are giving you, it's giving you better service, which equals better productivity, which equals lower price for the end user. And it was our observation that in some of the very big projects, and possibly the customer that ITM lost, was that the incumbents who are vertically integrated are grooming their customer base."
Carter Holt Harvey was an observer at the hearing but, despite repeated requests from commissioner Dr John Small, did not offer a response. Newsroom, too, has approached the company for comment.
Importing timber
ITM attempted to help suppliers import product alternatives from overseas during the supply chain disruptions and shortages, some of which were still continuing, Hughes said. "Product supply was affected across a suite of important lines – plasterboard, structural timber, plywood, steel, cladding, fasteners, and other product categories.
"Almost all our attempts to engage overseas suppliers to fill the gaps ran into some form of regulatory hurdle or delay.
"This was so even for large and well-established overseas supply sources. Issues included difficulties when attempting to help a supplier of ours ensure product was considered fit for purpose and up to New Zealand specifications. That required, for idiosyncratic reasons, minor thickness or tolerance differences to meet our local standards compared to mainstream overseas markets.
"We had to persuade suppliers to make special runs or adaptations to meet local New Zealand specs, or hope those tolerance divergences would have been accepted by councils and building consenting authorities."
Some builders and retailers sought to import structural timber, to get around the Carter Holt supply constraints.
But Ian McCormick, from Auckland Council, told the Commerce Commission hearing that building consents authorities looked sceptically at imported building supplies. "Quite often, one of the challenges we have with products that we don't see so often, they often don't have evidence of how they actually fit into the types of systems we've got in New Zealand," he said.
"So, for example, a lot of timber framing which may be in the United States, they don't see as much of. Often a lot of those products, the suppliers and the manufacturers don't actually test them in the sorts of systems we're likely to use here because it's just not worth their money of doing it."
ITM argued there should be more ability to rely on globally or regionally recognised standards, to enable international suppliers to enter the market – and it got support from the biggest player.
Andrew Clarke, the group general counsel for Fletcher Building, said they would be "theoretically" happy to import structural timber, if the Government gave the green light.
"Would a product or a system that is certified in a local country, a different country, would New Zealand accept that?" he asked. "If the New Zealand Government, through its agency, said that is a perfectly acceptable product – a window, door, plasterboard, timber truss – then as long as that was open and transparent and public, that would be a good thing for the economy here."
Builders face new stress
Independent economist Tony Alexander's monthly survey of mortgage advisers, published this morning, finds that first home buyers are "back in the market". But that provides little solace for builders, as investors are continuing to hold back.
CBS Co-op chair Carl Taylor says the problem for construction firms has moved from a supply crisis, to a demand crisis.
CBS buys building supplies in bulk for its 1000 members, from Northland to the Bluff. It buys from a range of suppliers, which Taylor says insulates its members from merchant-specific troubles such as the structural timber shortages.
Taylor said the Tony Alexander survey confirmed investors were holding back, causing problems with commissioning the construction of townhouses. "With the new-build sector, with what we've gone through the last two years, a lot of the people out in the marketplace are a little bit worried and uncertain," he told Newsroom.
"A lot of people don't want to sign up to a new-build off the plans now, because they don't know what's going to happen with interest rates in 12 months' time, and they don't know if they're going to get supply.
"The storm is coming. You've just got to look at section sales at the moment, which are pretty much zero. So that's a pretty good indicator that things are going to slow in terms of that spec market.
"I am aware of some group builders that haven't sold much since about March, so that's quite concerning. And I know a lot of townhouse builders around the regions, their sales are really dry, too."
