Between June 2015 and June 2017, Australian MGP10 prices trended down in real terms in the middle of the most recent and prolonged construction boom. This trend apparently bucked conventional wisdom where prices increase in times of high demand. Three trends in the market were apparent which may explain this unusual event. They are:
- The increase in total DUA and DUC was being driven by apartment construction alone, as DUA and DUC in housing construction had shown a flat trend since the end of 2014 (Figure 1). Housing construction, not apartments, is where most timber is consumed.
- Fuel prices also declined significantly during the same period, reducing transport costs and allowing timber traders to decrease prices while still maintaining unit margins (Figure 1).
- Softwood timber imports declined in the same period, down 21% to mid-2017 (Figure 2). Lower prices would have pushed imports out of the market. As prices recovered, so did imports.
Figure 1: Dwelling Unit Commencements (DUC) Total and Houses, MGP10 Timber Prices and Fuel (Diesel) Price Indexes by Quarter
Note: period June 2015 to June 2017 shaded.
Source: TMS, ABS, AIP, Margules Groome
Figure 2: Australian Softwood Sawnwood Imports by Quarter
Source: ABARES, Margules Groome
As houses (as opposed to apartments) are the primary driver of timber consumption, the first trend may indicate weaker than anticipated upward pressure on prices. The second would indicate that domestic timber producers may have also taken advantage of the low transport cost environment, lowering prices while maintaining reasonable margins. This resulted in the third trend – domestic producers taking market share from timber importers. The combination ensured that although overall timber volume demand was historically strong, this was not reflected in timber price increases. It appears the softwood timber industry has not been able to, or wanted to, fully exploit the benefits of the booming domestic residential construction market to seek higher unit margins. This was reflected by the MGP10 price index trend – down for 8 consecutive quarters from June 2015. Thus, softwood sawlog prices flattened and declined.
For further information and analysis contact Margules Groome.