Wednesday, May 22

Timber industry to benefit from higher log prices, demand from Japan

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AVERAGE PRICES: At the same time, RHB Research projected that log prices to average about US$220 to US$240 per cubic metre in 2013 and US$240 to US$260 per cubic metre in 2014. — Bloomberg photo

KUCHING: The timber industry’s near term catalysts continue to be exciting, supported by the monsoon season in Malaysia and Indonesia which leads to softer production and higher log prices and Japan’s improving economy which spurred plywood imports.

RHB Research Institute Sdn Bhd (RHB Research) in a report said due to the rainy season in Malaysia, timber production will be less with prices of timber and related products likely to go up.

“We continue to be postive on the prospects of the timber sector, on the back of the on-going monsoon season in Malaysia and Indonesia, which will lead to log shortages, Japan’s improving economic activity too is spurring plywood imports,” it explained.

“On the log front, production continues to be hampered by depleting natural resources, more stringent environmental safeguards being imposed and weather abnormalities, which have become commonplace due to global warming,” it said.

It added that in January to September period, production of log in Sarawak fell 16.4 per cent year-on-year (y-o-y) caused by unusually wet weather as a result of more rain in certain logging areas in the first quarter.

The research firm noted that as Malaysia enters the monsoon season, log production is set to fall once more in the coming months which could result in log production declining more than RHB Research’s forecast of 10 per cent y-o-y.

Thus, the research firm lowered its log production volume to 15 per cent y-o-y for this year.

It observed that log prices for November to December period have started to rise on expectations of a log shortage during the monsoon season and the recent stabilisation of the Indonesian rupiah.

RHB Research said currently, Malaysia’s log prices are about US$240 to US$250 per cubic metre, which is up 14 per cent to 15 per cent y-o-y from US$210 to US$230 per cubic metre.

Additionally, the research firm continues to expect India’s investment in the infrastructure and industrial sectors to provide higher demand for logs in 2014.

It noted that this would support log prices at current level of US$240 to US$260 per cubic metre for next year.

At the same time, RHB Research projected that log prices to average about US$220 to US$240 per cubic metre in 2013 and US$240 to US$260 per cubic metre in 2014.

The research firm pointed out that as the average log production cost is about US$120 to US$140 per cubic metre, log manufacturers continue to enjoy healthy operating margins.

Meanwhile, RHB Research said Japan continues to witness more housing construction projects on its aggressive policy easing to reflate the economy.

It noted that Japanese plywood import volumes had improved, growing 7.4 per cent y-o-y in January to September as demand from house builders and pre-cutting plants rise.

It believes that plywood prices will resume the gradual uptrend trajectory at the start of 2014 on stronger demand and weaker supply of raw materials given the monsoon season.

The research firm projected that plywood prices is expected to rise by four per cent to six per cent next year from current level.

On the other hand, it also observed that with the recent increase in crude palm oil (CPO) prices, companies such as Ta Ann Holdings Bhd and Jaya Tiasa Holdings Bhd are expected to benefit as their plantation divisions contribute about 40 per cent to 50 per cent to their bottomline.

The research firm also upgrades its CPO price assumption for 2014 to RM2,700 per tonne and RM2,900 per tonne for 2015 from RM2,600 per tonne for this year.

With better plantations earnings and a stable to improving outlook for the timber industry added with a weaker ringgit which is favourable to exporters, RHB Research maintains its positive prospects on the timber sector.