Neutral outlook for timber sector in 2015

KUCHING: Analysts maintained their neutral outlook for the timber sector this year.

RHB Research Institute Sdn Bhd (RHB Research) yesterday said despite expecting log demand to remain stable while log prices to rise on supply constraints in 2015, this would be offset by weak plywood sales volumes and lacklustre plywood prices.

In the first few months of 2015, the firm observed that logging harvests have declined year-on-year (y-o-y) due to heavy monsoon rains in Sarawak which caused difficulties in harvesting operations.

It said major timber companies such as Ta Ann Holdings Bhd (Ta Ann) and WTK Holdings Bhd (WTK) recorded lower logging harvests in the first two months of this year while Jaya Tiasa Holdings Bhd recorded a slight improvement compared with last year.

RHB Research analyst Hoe Lee Leng said, “We believe log harvests in Sarawak may be flattish in 2015 given the weak first quarter 2015 (1Q15) numbers.

“Meranti log prices are therefore expected to continue rising in 2015. In February or March, prices are up 18 per cent y- o-y.

“Although this is higher than our projected price increase of four to six per cent for 2015 to 2016, we prefer to remain conservative for now,” Hoe added.

Looking ahead, RHB Research believes supply constraints for log could continue to persist in the long term due to the Chinese government’s ban on logging.

The latest development is the Chinese government’s recent announcement of its intent to phase out commercial logging in all natural forests by 2020.

Nonetheless, although Chinese softwood logs do not compete directly with Malaysia’s hardwood logs, RHB Research believed there is some level of substitution albeit of limited amount.

Over the long

run,

the firm opines that the ban, if implemented properly, will widen the gap between timber demand and supply, thus bode well for log prices, whether hardwood or softwood.

Meanwhile, the research firm observed log production in Sarawak increased 6.1 per cent y- o-y in 2014.

It pointed out Ta Ann registered a growth of 26 y- o-y for its log production and WTK reported 14 per cent y- o-y increase in its log production last year.

On another note, RHB Research observed that Japan’s housing start continued to fall, which dropped 8.9 per cent y- o-y in 2014 and a further 13 per cent y- o-y in January.

It believes the slowdown in home construction in Japan, a major destination for the export of plywood will translate to lacklustre plywood prices in the medium term although log supply constraints could compensate some of the impact of weak housing starts.

For that, RHB Research maintains its neutral outlook for the timber sector at this juncture.