Posted on January 1, 2011, Saturday
KUCHING: The tight log supply situation in Sarawak is likely to continue for a few more months this year due to seasonal factors before log production starts to normalise. The price of tropical logs had performed very well in 2010, partly due to this situation.
Nevertheless, tropical log prices would remain firm even when log production starts to pick up due to the huge and robust demand from India and China, said RHB Research Institute Sdn Bhd (RHB Research) in its recent research report.
Other than that, another year extension of the 50 per cent log export quota was likely to be granted to the timber players once the current extension expires in the first half of this year, as the Sarawak Forestry Department continued to remain supportive of the timber industry, in view of the current low utilisation rate of the plywood division for most timber players.
Prices for tropical plywood had also performed quite well in 2010, rising by between eight per cent and 14 per cent year-to-date on the back of steady import demand from Japan which was up by 12.1 per cent year-on-year (y-o-y) for the January-October 2010 period.
Going into 2011, selling prices and demand for plywood were expected to remain firm, underpinned by improving housing starts in Japan. Hence, industry capacity utilisation rates were likely to remain stable at between 60 per cent and 70 per cent, as timber players were not eager to increase their plywood production volume until demand is on a more stable track.
RHB Research shared its view that the improved and stable outlook for plywood would keep the plywood division of timber players at a profitable level in 2011 unlike previous years, when losses were incurred due to stagnating plywood prices.
To recap, the latest October 2010 Japan housing starts growth of 6.4 per cent y-o-y was the fifth consecutive y-o-y rise following the previous 17.7 per cent and 20.4 per cent y-o-y growth recorded in September and August respectively. This was supported by the number of building permits issued, which was 3.4 per cent higher y-o-y in October 2010.
Going forward, RHB Research expected further improvement in Japan’s housing would start to boost the overall demand and sentiment for the timber sector. However, timber players had to increase selling prices in order to compensate for foreign exchange losses.
RHB Research’s economic team pointed out that the ringgit vs US dollar exchange rate would likely strengthen between RM3 and RM3.10 this year.
While the strengthening of the ringgit would affect timber companies’ US-based revenues, it believed the current rising price trend for both logs and plywood would partially compensate for the exchange rate movement.
For 2011 and 2012, the team projected log and plywood prices to increase between three and six per cent per annum in US dollar terms, but to increase by only between two per cent and five per cent per annum in ringgit terms.
Based on the analysis done by the team, WTK Holdings Bhd was the most sensitive to US dollar price movements, where every five sen/US dollar change in exchange would change earnings by between 11 per cent and 13 per cent, while Evergreen Fibreboard Bhd was the least sensitive, where every five sen/US dollar change would only change earnings by between one per cent and two per cent.
The research house remained positive on Ta Ann Holdings Bhd and Jaya Tiasa Holdings Bhd, as both companies had significant oil palm plantations that were similar to mid sized plantation companies.
The rising crude palm oil price trend, coming in at a time when fresh fruit bunch production for both companies were set to rise significantly over the next few years would provide a major boost and change to their earnings profile from 2011 onwards.
Among the risks stated on the report were the lower than expected improvement in Japan’s housing starts and the price discounting from neighbouring countries with lower cost of production, resulting in lower exports from Malaysia to its major export markets.
