Competition reforms would weaken key prop for Fletcher's Gib arm, says analyst

Friday, 5 August 2022

Former Commerce Commission chairperson Anna Rawlings discusses its draft study into building supplies (video first published in August).

Fletcher Building’s dominant position in the plasterboard market could be slowly eroded if recommendations in a draft competition report are implemented, broker Forsyth Barr has suggested.

The Commerce Commission did not recommend breaking up Fletcher Building’s business in its draft market study into the building materials industry which was published on Thursday.

But it did recommend regulatory changes aimed at making it easier for manufacturers and importers to bring new, competing products into the market and to have them accepted in building consents.

It also foreshadowed a crackdown on some “rebates” on products, including plasterboard, offered by major suppliers to their resellers that dissuade resellers from strongly marketing rival products.

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Forsyth Barr says the Commerce Commission’s draft recommendations would weaken a key prop supporting Winstone Wallboards’ dominance of the plasterboard market.

The commission estimated at least $250 million was spent on plasterboard each year and its preliminary view was that competition in the supply of plasterboard was not working well.

Forsyth Barr said the reforms proposed by the Commerce Commission “seem modest at face value and won't result in an immediate step change in competition in plasterboard”.

But it said it believed the proposed reforms would weaken a key prop supporting Fletcher’s dominance of the plasterboard market, in which the commission estimated Fletcher’s subsidiary Winstone Wallboards had about a 95% market share through its Gib products.

Forsyth Barr noted that the commission appeared to signal in its report that Fletcher Building would need to review its rebate schemes to ensure they were compliant with the Commerce Act as it will read after an amendment takes effect next year.

In its discussions of the plasterboard market, the commission said “suppliers with substantial market power particularly those in highly concentrated markets”, should review their rebate structures for compliance with the revised section 36 of the Commerce Act which comes into force in April.

But any changes in Winstone’s share of the plasterboard market would be slow to come about, in part because builders were likely to be reluctant to move away from established products, Forsyth Barr said.

It estimated profits from Winstone’s plasterboard business made up about 14% of Fletcher’s total operating profit, which Fletcher’s last reported at $332 million in the six months to the end of December.

Jarden analyst Grant Swanepoel predicted on Thursday that the commission’s market study would have little impact on Fletcher Building.

Fletcher Building did not take up an invitation to comment on Forsyth Barr’s report.

The company said in a statement on Thursday that the commission’s market study was comprehensive and it would take its time to consider the points the commission had made.