Jane Clifton: Government’s housing policies hamstrung by reluctance to act on timber, power prices

Reluctance to tackle the perversities of the electricity and timber sectors is coming back to bite the Government.

Power corrupts, but wholesale power is insidious on a whole other level.

Electricity prices are embarking on a rampage that euphemising politicians will doubtless try to characterise as “fluctuation”. They’ll mostly be fluctuating upwards.

Stand by for a new political catch-phrase: power poverty.

It’s as though the forces of nature have combined with the man-made perversities of the market to blow a mighty raspberry at the Government, Commerce Commission, Climate Change Commission, Electricity Authority and every other entity trying to bridle and rationalise our energy sector.

We’ve had a dry La Niña weather system and a storage shortage in our hydro lakes, which alone would be enough to bump up prices. But the sector has a slew of further excuses that are more to do with past and future profit protection than climate.

One excuse is the need to upgrade kit. The various generators blame one another, the Government and greedy consumers for their chronic under-investment in the grid, but at its root, underinvestment in tomorrow is the result of profit-maximisation today.

There’s also been a steely determination to optimise pricing irrespective of underlying supply conditions – most shamefully displayed by Meridian, which was pinged last year for deliberately spilling hydro water to drive prices up. Aside from a couple of small players, there’s a paucity of genuine price competition, with most “discounting” being window dressing.

“Everybody’s picking on us!” is a fair excuse. The sector is increasingly in the state’s sights, with the Commerce Commission and Electricity Authority looking at corrective regulation and climate change mitigation posing further disruption.

Understandably, companies get self-protective and battle-ready in uncertain times. The Electricity Authority’s attempts to optimise generation efficiency through pricing have brought years of litigation and delay, and though the agency may be equally at fault, it’s meant money being spent on consultants and lawyers rather than generation efficiency.

Knowing the energy sector’s parameters could change at any time has made the players even less minded to cut prices. The whole system is stupidly perverse and complicated. Households may be well advised to take the cheapest long-term fixed-price deal they can find and hunker down.

Decision time

Meanwhile, a quick quiz: you’re an industry-dominant building products company at a time when the Commerce Commission is looking at how to remedy the lack of competition in your sector and the Government is desperate to get more houses built. For various reasons, including your own errors, there’s a serious shortage of construction timber. Should you (a) work like the clappers to backfill the shortage and ensure all your customers get as much as you can manage or (b) cut off customers you have no financial interest in and leave projects stalled and builders facing ruin?

Carter Holt Harvey chose (b). Consumers should probably thank it, because that decision has given extra impetus to reform of the construction sector. The commission immediately launched an anti-competitiveness investigation, bulking up the list of reasons it already has reduce the power of companies like Carter.

That’s not to even start on the out-of-whack relationship between the construction and forestry sectors, which is a further stupidly complicated facet of the timber shortage.

It’s long been a perversity that this country grows so much timber yet processes so little of it. It’s one of our major export earners, but other countries get the benefit of making optimal money from it, because we export most of our logs almost entirely unmolested.

New Zealand First’s Shane Jones made an – admittedly cack-handed – attempt last year to ramp up local timber processing when he was Forestry Minister but failed spectacularly. He thought by limiting permissible log exports, he could force the industry to process more at home.

Confoundingly, we haven’t the sawmill capacity to even dent the log pile he was hoping to detain. Even with a stay-at-home log quota, no one could guarantee sawmills would suddenly become a sexy investment again. Jones’ heart was in the right place, but if there’s one thing worse than being wrong, it’s being right at the wrong time.

Now Russia has banned its log exports outright for exactly the same reason, and downstream we’re bearing the brunt.

China, absent the Russian log supply, is now paying even more for our logs than before. This in turn is exacerbating the scarcity of our domestic processed timber.

The shortage was already developing nicely thanks to the pandemic lockdown, with New Zealanders spending what would have been their holiday money on renovations and with the housing shortage fuelling new development. Also, timber processing fell behind expectations, as Carter closed one mill before it could ramp up production at another as quickly as planned.

Talk about not being able to see the trees for the “woulds”. Politicians and officials have been so reluctant to tackle this self-distorting market that they’ve copped this extremely foreseeable problem just as a new housing package stands a fighting chance of accelerating new builds.

Stupid complexity

Who or what is to blame for all this stupid complexity is an issue at which the Invisible Hand of the Market tends to make “Shoo! Shoo!” gestures. “Vertical integration”, in which the biggies like Fletcher and Carter have overdominant interests through the supply chain, is the shorthand explanation. Our history of import licensing and the challenge of economy of scale in our small population are culpable for fattening up a couple of “hero” companies rather than allowing a diverse, competitive market to develop.

Frustratingly, the commission was set to investigate the sector in 2009, but the new National Government, philosophically opposed to market intervention, kiboshed it.

Alas, unlike Russia, New Zealand does things the plodding, old-fashioned way, relying on private and/or state investment and judicious regulation to address market imbalances, rather than overnight coercion, so our log-jam will take time to resolve. Meanwhile, alternative, more plentiful types of processed timber could alleviate the shortage, but this will necessitate design changes that will increase building costs. Steel framing is also an option, but again, it’s dearer. Before anyone suggests concrete, there’s a waiting list for that, too, because it’s perishingly un-green and quarrying is increasingly restricted.

Sometimes gallows humour is the only refuge. We already have a severe construction labour shortage, so maybe this will achieve an equilibrium with our building materials shortage – as close as we’ve come to a balanced sector.

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