Knauf takes on Fletcher in plasterboard market as NZ mulls high costs of building

Knauf, the world's second-largest plasterboard maker, may build a factory in New Zealand, adding to a chain of independent stores it is setting up to try to loosen what it says is Fletcher Building's grip on the market and dominance in supply channels.

The German company currently sources plasterboard for New Zealand from the Lafarge Plasterboard factories in Sydney and Melbourne it bought in 2011. As those plants reach capacity, a New Zealand factory "is an option that will be considered," said John Russ, New Zealand sales manager at Knauf Plasterboard. Fletcher's Winstone Wallboards unit has two manufacturing plants in New Zealand.

A lack of competition for building materials is among reasons cited in a Productivity Commission report last year that found it costs as much as 30 percent more to build a house in New Zealand than Australia. The Commerce Commission is currently probing Fletcher's plasterboard supply arrangements with building supplies merchants, adding to an inquiry made public in June into Auckland's commercial timber market.

Fletcher sells its products through its Placemakers retail chain and its dominant market position includes sales of Winstone Wallboards Gib products and Pink Batts insulation through rival chains Bunnings, Mitre 10, Carters and ITM. Russ says Knauf faces resistance getting its products into those stores, hence its move to establish the PlastaLink Trade Centre independent outlets.

"It would be fair to say that over the years they have been significantly tied in to the dominant player in the market," Russ told BusinessDesk. "We have to have a channel to be able to sell our product."

Knauf this month gained BRANZ approvals for its plasterboard, allowing the company to compete in the residential market after winning a share, along with Fletcher, of government contracts in the rebuilding of earthquake damaged Christchurch, worth some $40 million.

Last month it opened distribution centres in Auckland and Christchurch, and secured a preferred supplier arrangement with the country's No.2 building company Hawkins Construction.

Industry sources say Knauf's 10mm standard wallboard and 13mm ceiling board are 5-10 percent cheaper than Fletcher's equivalent product while its pricing for premium line boards such as ultraline is as much as 50 percent cheaper.

Russ says both Knauf and Fletcher buy raw materials for plasterboard, gypsum and paper, from the same suppliers in Australia, meaning they should have comparable manufacturing costs.

"We believe in projects that we have priced so far, we have been very, very competitive - the feedback has been very promising," he said. "But of course when you have a dominant player that has been there for a long, long time they have flexibility in pricing that I am sure we will see in the market." Anecdotally, pricing has become more competitive since Knauf entered the market, he said.

In a submission to the Ministry for Business, Innovation and Employment's market-level study into the residential construction sector in June, Fletcher attributed high material costs in New Zealand to a preference for bespoke homes, manufacturing that lacks scale, high transport costs, and New Zealand factors including seismic risk and insulation demands.

Finance Minister Bill English said last year that Fletcher was likely to come under scrutiny in a wide-ranging review of building sector costs as part of the government's response to the productivity report. Housing Minister Nick Smith said there was significant concern about the cost of building materials and the government wanted to ensure competitive pressures were working.

The government is currently sounding out ways to clamp down on what could be a $3.3 billion annual spend in on building materials over the next five to eight years in the state sector, as it deals with the fall-out of the Canterbury rebuild and the ongoing leaky homes saga.

The biggest company on the NZX 50 Index argues that it faces competition from local and offshore suppliers "at every point in the manufacture and distribution chain." Fletcher shares last traded at $9.54 and have gained 14 percent this year.

At the time Knauf won a share of supply contracts for Christchurch at the start of the year, Economic Development Minister Steven Joyce said its arrival in the market would increase competition, saving the government as much as 6 percent on plasterboard, and would potentially push down prices for consumers as well.

Knauf has operations in more than 60 countries worldwide and produces more than 1 billion square metres of plasterboard a year, according to company figures. The company is aiming to encourage independent business owners to set up an initial 10-12 PlastaLink stores in major centres. It says Tauranga is a potential site for a plasterboard factory because of its port and transport facilities.

"We hope to have a significant impact on the market," Russ said "We are here for the long term" although the market "has been very, very conditioned to a dominant player and we don't expect change overnight."

(BusinessDesk)