A Current Perspective from Shane Vicary, AKD

I landed in the Forest Products industry over 20 year ago and I have generally loved every minute of my career. I have experienced some real highs and worked through some difficult times as well.

For the entire time I have been at AKD I have felt I have had the best job in the industry. Every day I have the pleasure of coming to work with a fantastic group of people and for a company that is focused on growing and improving.

This year has certainly provided a series of challenges from Bushfires to Coronavirus, to various governments management of COVID-19 outbreaks.  Some of these challenges have been shared by you and some are specific to AKD.  We idled the Irrewarra sawmill in May as we saw demand potentially falling due to COVID-19, and then we had the Caboolture Sawmill temporarily shut due to a Biomass fuel shed fire.

When AKD elected to reduce our production earlier this year, we were very public about our decision, and sent various governments plenty of correspondence.  At the same time, we sought to reassure customers about Australia’s supply capability, and encouraged the buy local campaign. The publicity was to ensure that we used the media to highlight the industry issues and help encourage the government to intervene to prevent further job losses. So, in early June, when the Home Builder Grant (stimulus) process was announced and the Treasurer specifically mentioned timber mills, I felt we were listened to.

Due to the stimulus we have seen a shift in confidence and a surge in demand, which has helped our industry avoid a significant reduction in activity.  But we remain nervous and therefore cautious about the future with still no overseas immigration, which means low population growth and therefore potentially reduced future demand for new houses.  What will happen after Christmas, what will Victorian truly look like after the lockdown is finished, are common questions in our business.

AKD Supply Security & Investment for Capacity Growth

So, the other topic I would like to put a perspective to you is that of the timber market balance dynamics and AKD’s views on how we approach and manage this. We haven’t yet experienced a drop in demand from COVID-19 and from AKD’s perspective we have therefore worked very hard to be an ongoing reliable supplier to our customers providing reliable supply even with the Irrewarra sawmill shut and with Caboolture offline due to the fire.

I am very proud of how our teams have handled this disrupted and stressful time, especially those who are managing our customers’ expectations every day regarding lead times and product availability.  I mentioned at the start of this article how I had an enjoyable and rewarding career to date, however one aspect of this industry that really frustrates me is our lack of data and analysis across the whole supply chain regarding supply and demand outlook, and some parties cynical and destructive behaviors.

As an industry we have the supplier and customer relationships that work and are based on supply security through the cycle. Then there are the relationships where supply and demand forces are “weaponized”, where tension is leveraged to maximize the position for one party over another at any one point in time.  How destructive is this truly for our industry? What does the supply chain think of these antics, what behaviors does this create, what do our customers customer do to get away from the price volatility? I think they seriously consider converting to alternative products which are more expensive but less volatile in price.  Does the fabricator truly win, when they drive the price down in an over supplied market, does the sawmiller win when they get retribution during periods of shortfalls through multiple price increases?  Or do we all collectively lose as we create more and more uncertainty.

AKD would prefer price stability and programmed business with planned growth, this is our objective. We do not want to supply customers on a transactional “best price” basis of the day – that is not sustainable for either the supplier or the customer in the long term, and is not what the builders and developers expect around price stability. We have made a significant investment in our property, plant, and people, and no doubt you have too.  Therefore, we value business consistency and forward commitments of volume and in return we provide supply security to our customers.

There is currently a lot of conjecture right now not only about ongoing demand but also supply.  So, this creates irony for me, customers that want to use over supply situations to drive the price down and which lead AKD to close plants, now want reassurance that there is sufficient supply in the future. Do we provide reassurance, and then risk further downward price pressure, or do we weaponize our information to maximize our price potential? What would you do?

With the Dunn’s Road January bushfires, it is well known that sometime post the Salvage logs the Tumut mill will need to reduce production.  Right now, import volumes are also under pressure with more favorable markets elsewhere in the world. So does AKD look to “weaponize” this fear about timber shortfalls and tension the market.  Or do we look to provide reassurance that we have sufficient capability and capacity to provide security of supply.

We look to provide security of supply reassurance because Honesty is one our core values, and we need to end the destructive cynical cycle. AKD’s supply capability will grow by approximately 30% in total softwood output over the coming 1-2 years. The timing of this will need to coincide with market demand and customer commitments. Our increased net supply availability, particularly of structural products, will come from the following major decisions by AKD:

• Acknowledging our Tumut sawmill log in will reduce by 35% in mid to late 2021 due to the impact of the fires from its normal processing levels in 2018.
• Caboolture restart is scheduled for mid-September 2020
• We are planning on restarting our Irrewarra sawmill in October 2020
• We will double our capacity at Caboolture in 2021, the structural grade output of this mill is about 30% higher than Tumut, more than offsetting the Tumut reduction in supply.
• We have plans to further increase Caboolture capacity as market demand sustainably increases
• We have additional capacity at our Colac mill
• In 2022/3 we could upgrade the Tumut mill to lift the yield reducing the reduction in timber production.

This all forms part of our longer-term view of market demand and requirements in the Australian market. Daily, weekly, monthly, and quarterly there will be minor imbalances but AKD is committing to growing long term with our customers and we are gearing up to do this immediately with Caboolture coming back online earlier and restarting our Irrewarra sawmill.  But we need your support!

What we expect in return from our fabricator partner customers is a healthy 2-way partnership approach that mutually recognises the business value of supply security and business consistency. We will not engage in supporting timber purchasing behavior that is focused on the short term and aims to create winners and losers. The inputs to our business do not operate this way e.g. energy, employment, and log contracts, so we will not be transactional in our approach to customers. We will continue to work with our customers on growing the market for our timber in Australia.

The Caboolture Restart & Investment for Our Growth

Last week we confirmed that the Caboolture Sawmill will recommence operations on the 14th of September 2020.  The Caboolture fuel storage shed fire in June was a particularly disappointing event for AKD and certainly was a distraction we did not need. But I believe it is also providing the opportunity to build a more sustainable Queensland manufacturing business and I am grateful for the team’s commitment to work on delivering a sustainable solution for the long term.  I am excited as we are turning this negative event into a positive one for the Caboolture team, as we look to eliminate a historical issue for this site with the replacement of the fuel shed.  We will have a brand-new fuel handling and storage facility.

AKD is excited to not only be recommencing production at the site earlier than expected but is also excited to announce new growth and investment plans for the Caboolture sawmill in the next 12-18 months. With other key investment in additional processing capacity and people, AKD will be doubling production over the coming 12-18 months. This will secure current jobs at site as well as provide at least an additional 100 permanent roles in the future. It re-affirms AKD’s commitment to the Queensland market and its’ customers.

AKD would like to thank our Queensland customers for their ongoing support during the Caboolture fire closure and we are pleased that supply was maintained from our southern mills.

AKD Investing in Market Growth

Given AKD’s commitment to grow its supply in the order of 30% over the coming 1-2 years, including immediate uplift from mid-September, we need to put the outlook for market demand in context – medium and longer term. As we all know the most relevant driver of demand for our businesses is new detached house building in Australia.

Australia’s annualized rate of detached house commencements is estimated to be confirmed at approximately 99,000 for FY20, down from 112,000 in FY19.  FY21 current forecast for detached housing is 98,500. FY22 is forecast to be back up to 110,000 levels. Longer term, the style of dwelling for Australians is forecast to continue to change and the opportunities for light weight prefabricated structures will grow in medium density dwellings and in all building types up to 8 stories where timber solutions are now deemed to satisfy under the BCA.

An example of AKD’s investment in growing the market for our fabricator customers is our 4-year top-level sponsorship to date of the WoodSolutions® Mid-Rise Advisory Program, leveraging off our FWPA shareholding and levies. This is a significant investment by AKD in growing the Australian timber market for all, in a new market for light weight prefabricated solutions, to replace traditional steel and concrete solutions.   This is your opportunity to grab, that we have invested in creating.  This has been a seeding investment which is yet to pay dividends directly to AKD, so we hope you will recognize this as an investment to grow our businesses mutually. 

Well done to Kersten on the recent mid-rise building webinar series to build the knowledge and desire to grow this market. Timber Fabricators are a key part of the market conversion from traditional concrete and steel solutions and this is an opportunity for business growth and innovation.

We will continue to make decisions based on long term views and benefits, beyond pandemics and building cycles and in alignment with our values. AKD remains committed to long term relationships and to celebrating some fun times again in person when we are all able to do so safely. Thank you for your continued support.