Are you planning a renovation or new construction? Here’s the outlook for steel and lumber price surges

It is a difficult time to build or renovate a house in Australia. Prices have risen, well above inflation. Finding materials and getting them there on time is a challenge. Builders are dealing with too much work and stress (with some dropping out because costs rise too quickly). Customers are faced with dazzling price quotes.

And as any aspiring home builder or renovator knows, the price of lumber or steel is crucial.

So what exactly is happening here and what is the outlook?

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Wood: high demand, insufficient supply

According to a 2021 Australian Bureau of Agricultural and Resource Sciences and Economics (ABARES) report:

Average annual hardwood log availability is forecast to be 1 million cubic meters (9%) lower during 2020-24 than 2015-19 […] Softwood sawlog availability is projected to be 10% lower in 2020-24 than projected in 2015.

The same report shows that new minimum plantations were established in recent years.

Establishment of new plantations: The majority of new plantations in Australia since 1998-99 have been hardwood species, with minimal new establishment since 2012.

In the forest fires of 2019-20, 130,000 hectares of forest plantations were burned. The recent floods did not help.

Native forest harvesting is also falling; it will be banned in Western Australia by 2024. Victoria will phase out the industry by 2030.

A shortage of wood was expected as early as 2020, but the start of the COVID pandemic, when the housing market momentarily froze, brought a respite, with home construction and wood prices initially falling.

Then came HomeBuilder, which encouraged consumers to make purchases or renovations to revive the home building market.

The number of housing units began to skyrocket by more than 60%, from about 41,000 in September 2019 to 67,000 in June 2021.

The stock of homes under construction went from around 180,000 in 2020 to more than 240,000 today.

If you are building a lot more houses, you need more building materials. A slight projected deficit for 2020 has now turned into a black hole.

With less wood available, the industry forecasts a shortfall of at least 250,000 wooden house frames in the next 15 years. Scarcity is the new normal.

The result is rising domestic prices as timber processors struggle to meet contractual obligations.

Logs cannot be crafted. They grow, and this takes about 20 years. The only way to overcome the current shortage is by importing or replacing wood.

Importing wood is not cheap. Australia has very low costs to grow and harvest, less than half of the world’s leading exporters. On top of that, international shipping rates have increased in the last two years.

These act as barriers to imports, which have fallen considerably in the last decade.

Steel: supply chain problems and war against Ukraine

Steel is the typical substitute for wood. But builders and renovators won’t find good news there either. Steel prices also soared more than 42% in the year to March 2022, according to the Australian Bureau of Statistics.

Troubled supply chains have cut supply at a time of unexpectedly high demand, and investment has been scarce in recent years.

As a recovery was on the horizon, the war hit shipments of key stocks from Ukraine and Russia.

With few players remaining, homebuilders in Australia say they are at the mercy of a de facto BlueScope Steel monopoly in the light gauge steel framing market.

Earlier this year, BlueScope customers had to deal with a 38% increase in the price of steel fabrication products.

A 2021 federal government decision to impose dumping duties of up to 20.9% on steel imports from Korea and Vietnam didn’t exactly help drive prices down.

In February 2022, BlueScope posted its largest half-year profit to date.

According to its CEO, Mark Vassella, current trends are here to stay. The company intends to make the most of current market conditions and expand capacity, with plans to restart a decommissioned blast furnace in 2011.

What happens next?

The outlook for prices is gloomy.

Master Builders Queensland chief executive Paul Bidwell reckons material price increases may not yet have peaked.

There is no sign that timber prices will drop again, as they did in 2020. As for steel, 2013 was the last time there was a significant price reduction.

The Australian Bureau of Statistics (ABS/HIA) recorded an increase of around 40% in prices for reinforced steel, structural timber and steel beams in June this year.

Thanks to the boom in home construction, construction projects are now facing delays, further driving up construction costs.

Several builders have gone bankrupt. Those on a fixed-price contract who factored low material prices into their quotes now face the harsh reality of working with little or no profit, or even a loss.

Will construction prices go down? One can only hope, but it is unlikely to happen soon.

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