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Construction booming but challenges abound for the industry

The construction industry has experienced particularly dire conditions since the pandemic took hold in Australia in May 2020 that now continue even as the economy clicks into recovery mode. As NSW and Victoria begin to re-open after months of lockdown, the industry is experiencing a surge in demand for materials but that has coincided with serious supply chain issues.

This uncertain operating environment has increased the exposure to credit risk for suppliers and builders alike in what is already a notoriously high-risk industry. For small businesses and sole traders, operating on tight margins with low cash reserves, this disruption to cash flow can be extremely serious.

Traditionally, Australia imports around 20 per cent of its house frame timber but that has sunk to around 14 per cent due to the pandemic’s disruption of shipping and the spike in construction activity in the US and Europe that has sucked up a lot of the global timber supply.

The Australian timber industry is struggling to keep up with the post-lockdown construction boom as the government looks to build itself out of the pandemic’s economic woes. The introduction of the government’s HomeBuilder stimulus program, a positive initiative in principle, has placed extreme pressure on the supply chain.

There have been significant shortages of both labour and products, especially timber, steel and engineered timber products. HomeBuilder has amplified the demand for timber and consequently contributed to increased building costs.

The unprecedented post-lockdown demand has led to the price of timber rising sharply around the world, with builders struggling to get supplies as post-lockdown construction and DIY projects stretch demand. The increase in the price of Australian timber has been driven by the rapid expansion of demand for softwood. The demand for softwood had been stable since the 1990s so the sudden increase in demand has been a shock to the supply system of softwood plantations. Moreover, Australia recently experienced a loss of 60,000 hectares of softwood plantations during the 2019 Black Summer bushfires.

Gary Walker, Managing Director of Belmont Timber and Vice President of Housing Association NSW, outlined the causes of the challenging conditions in the timber industry, stating that, “the 2019 bushfires meant a 40 per cent reduction in the planting of new trees, and a rush to harvest timber in impacted areas”.

This forced local suppliers to look offshore for cheaper imported timber however this was no longer viable due to shortages and increased costs associated with importing because of the increased freight rates to Australia.

At CreditorWatch, we understand the issues that supplier uncertainty and reduced cash flow can place on a construction business. Our DebtorLogic tool helps businesses better understand the risk a customer poses to their operations by looking at their payment history across the market.

DebtorLogic allows you to prioritise your collections, adjust payment terms and manage your expectations of customers to give you an accurate representation of a business’s creditworthiness as well as a better understanding of how you are being paid in comparison to the market. The tool also allows you to make more informed financial decisions for your business in this uncertain trading environment as the economy re-opens.