Log price boost fails to lift timber stocks

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FORTUNE smiled on Malaysian timber players when Myanmar, the fifth largest tropical log producer, imposed a ban on timber log exports in April this year. The subsequent tighter supply in the market saw timber log prices surge to near multi-year highs. 

Thanks to the higher prices, timber players in Sarawak, such as Jaya Tiasa Bhd, WTK Holdings Bhd and Ta Ann Holdings Bhd, have seen their logging divisions post higher profits. To top it all, there is stronger demand for raw timber logs from major importer India. 

An executive with a Sarawak-based timber company tells The Edge that he expects prices to remain at around US$250 per cu m for the rest of the year. 

According to Affin Research, which is “neutral” on the timber sector, the strong demand for logs has kept the average selling price at US$250 to US$270 per cu m. 

In the first half of 2014, WTK’s log production rose 11.5% year on year while that of Ta Ann surged 38%. Jaya Tiasa’s production, however, shrank about 6% because of the monsoon season at the start of the year.

“We believe Indian demand for tropical logs will remain healthy in view of the country’s need for timber products for building and renovation. The stabilisation of the rupee also makes log imports cheaper,” says Affin Research in a Sept 19 report. 

The price of plywood, a key export for timber players, has been rising as well due to the shortage of logs, the research house adds. Concrete panel and floor base plywood, which are mainly used in Japan and South Korea, have risen 14% (to ¥1,300 per sheet) and 9% (to ¥1,600 per sheet) respectively y-o-y.  

Nonetheless, the firmer prices have not lent support to the stocks of the timber players. The higher contribution from timber would be offset by lower earnings from oil palm as a result of weak crude palm oil prices, say analysts. 

Tepid demand for plywood from Japan because of a higher consumption tax in the country is not helping either.

In fact, Jaya Tiasa’s shares have been on a downward trend since May, falling from around RM2.70 to RM2.14 last Friday. Ta Ann slipped from a year high of RM4.49 to RM3.87 while WTK has been hovering between RM1.30 and RM1.45 since March. It closed at RM1.31 last Friday. 

Jaya Tiasa and Ta Ann have exposure to both CPO and plywood while WTK is mainly a timber producer and plywood manufacturer.  

“We are positive on timber but not plywood because we don’t see demand from Japan (the major market). True, CPO prices have recovered slightly, but they are still lower than a year ago,” says RHB Research’s timber analyst Hoe Lee Leng, explaining her “neutral” call on the sector. 

Nevertheless, there is a glimmer of hope on the plywood front as the latest Japan Lumber Report says demand for real estate should kick in as consumers prepare to buy more properties before the next consumption tax hike in 2015. 

Meanwhile, the move by the Ministry of Plantation Industries and Commodities (MPIC) to exempt CPO export duties for September and October, in response to high inventory levels and low CPO prices, has had a positive impact on CPO prices recently. 

The third-month benchmark CPO futures contract started rising after the announcement on Sept 4, recovering from a year-low of RM1,929 per tonne on Aug 29 to RM2,179 last Thursday. Speculation that the MPIC will extend the tax exemption is expected to lift CPO prices further. Nonetheless, RHB Research’s Hoe says Jaya Tiasa and Ta Ann are unlikely to benefit from the exemption as their CPO is sold to local refineries.     

Affin Research says Jaya Tiasa’s and Ta Ann’s oil palm plantations contributed more to revenue in 1H2014 than in 1H2013 because of the better CPO prices. 

However, industry players are not holding their breath on future prices. “Current CPO prices are nowhere near the levels seen in the first half of the year. The third quarter was weak and we don’t really know how the fourth quarter will fare,” says the executive of the Sarawak timber company.

Usually, production levels wind down towards the end of the year, lifting CPO prices. But analysts have a dim view on the short-term outlook for the plantation sector. Affin Research and RHB Research have trimmed their CPO price forecast for 2014 to RM2,400 per tonne from RM2,700. 

As for the timber sector, Affin Research says, “Key re-rating catalysts for the sector include stronger-than-expected economic growth in the key import markets (Japan, India and China), which should boost  demand; a sharp reduction in competition from other major timber-exporting countries; and the strengthening of the US dollar.”

 

This article first appeared in The Edge Malaysia Weekly, on September 29 - October 5, 2014.