A lot of bullish news on the timber sector lately: Timber product prices on the rise.
- Timber product prices on the rise
By LEONG HUNG YEE
PETALING JAYA: Prices of Malaysian timber products have been rising steadily as the raw materials shortage became critical as a result of tropical thunderstorms.
CIMB Research said in a recent report the heavy rain in the country since February had affected timber-harvesting activities and could dent log and plywood supply over the next few months.
“This could lead to a log shortage over the next few months, which is likely to translate into much higher timber prices if demand from Japan picks up quickly during the same period,” it said.
CIMB said China could be one of the key factors in a major turnaround for plywood prices. It said China’s plywood production had declined since the government reduced the export rebate from 20% to 5% at end-2007. If the output continued to fall, a further recovery of plywood prices in the coming months could be expected, it said.
“Although we believe the worst is over for the timber sector, we take a neutral stance until we see strong signs of a catalyst for the sector,” the research house said.
Meanwhile, analysts said timber products prices were not soaring but gradually improving. They said the prices had risen partly because of the constraints on supply and high transportation costs due to rising oil prices.
“While the construction industry in Japan is recovering, plywood manufacturers were not prepared to ease prices further.
“Rising fuel costs had caused many manufacturers to resist cutting prices. Moreover, some manufacturers were expecting demand to pick up as several reconstruction projects will be launched in China to fix damage caused by recent winter storms,” an analyst said.
Analysts continued to be optimistic about price stabilisation in the near future. However, they expressed concern over the volatility of oil prices as well as a possible recession in the US.
According to Malaysian Timber Association president Datuk Sheikh Othman Rahman, industry players could expect to see better times ahead now that the worst is over for the local timber industry.
He viewed the timber industry as a vibrant industry, contrary to market perception of it being a sunset industry.
“Malaysia’s timber exports have risen to RM23.3bil in 2006 from only RM14bil in 1996, with the largest export markets being Japan, the US and China,” Othman said, adding that timber exports were forecast to reach RM50bil by 2020.
Going forward, Othman expected timber companies to move towards more downstream production. He added that the Government had set up a special purpose vehicle to disburse RM1bil under a 15-year programme to plant 375,000ha of high-value timber trees by 2020.
Meanwhile, two foreign brokerages, Merrill Lynch and Credit Suisse also issued calls to upgrade the timber sector last month.
Credit Suisse issued a note to upgrade the Asian timber sector from neutral to overweight. Merrill Lynch's March 4 report said plywood prices had reached a bottom and had started to pick up.
And here is another news clip: Merrill: Plywood prices starting to rebound
- KUALA LUMPUR: The recent rising plywood price trend is lending support to our view that prices have reached a trough and are starting to rebound, said Merrill Lynch Research.
It said according to forest products industry players, the recovery of plywood prices is gaining visibility and the upside impetus is expected to flow through to May. It said March concrete panel (CP) prices rose 11% month-on-month to US$480/m3 (RM1,536/m3), adding that indicative prices for April and May are also seeing another 10% higher month-on-month .
“If this actuates, May CP price would be only 20% shy of all the all-time high,” it said.
In a research note, it said that the Russian government will raise the softwood log export duty to 80% by January 2009. It opine that once the 80% duty is imposed, many plywood mills using Russian logs will be out of business, adding that this development would boost prices of log and plywood.
It reiterated it’s buy recommendations on Ta Ann Holdings Bhd (34% upside) at a price objective (PO) of RM10.15 and WTK Holdings Bhd (40% upside) at a PO of RM3.30 on the back of improving industry fundamentals.
“Both companies have long-term volume growth plans in place via forest planting and have also diversified into palm oil plantation.”
I had made 2 postings on this sector, Credit Suisse goes bull on Ta Ann and More on Timber Sector
Today RHB had a report on this sector and I was able to get a hand on the report.
In the second page, RHB analyst wrote abut the possibility that 'History May Repeat Itself'.
- Recall, in late-2006, in anticipation of the Russian export tariff hike from 6.5% to 20% effective July 2007, and coupled with the Indonesian government's efforts in curbing illegal logging, Japanese timber traders and stockists began stocking up logs and plywood. Sequentially, plywood prices soared to record levels in late-2006 (refer to Chart 4)....
I am less than convinced.
Yes, history can always repeat itself... but based on today's variables, I have my doubts.
- Based on current economical environment, with tighter global credits, would Japanese timber traders and stockists want to stock up their lumber???
- Look at the housing chart (chart 2) provided by RHB. The housing starts are showing the glaring difference between 2006 and 2008. Why would Japanese timber traders and stockists want to stock up their lumber??? ( See chart from RHB below)
How now my Dearest MooMooCow?
Would you want to be in this sector?
Do you see enough justifications to be in the timber sector?
Yes, they say that there recent timber prices have shown a rising trend and that it indicates that perhaps timber prices have bottomed but do I see enough strong reasoning that suggest that timber prices should surge?
Do I see clear signs that housing starts in Japan are increasing? And given the massive issue within the housing market in America, could one even contemplate a housing boom in Japan? Reasoning is simple here again, without housing boom in Japan, where will the demand of lumber come from?
And if there is no strong demand for lumber, would one ever see a boom in the timber sector?
However, RHB analyst thinks otherwise. In page 3 of their report, they wrote the following:
How?
Do I want to be in this highly cyclical sector under the current economical environment?
Posts
3 comments:
Timber should be part of the commodity run up in the last two years, unfotunately the housing slump in US and slow housing start in Japan abruptly ended the party towards the end of 2007.
Just look at the fact, timber is limited resources. There are only so many trees that can be cut down and the new ones take a whole new human generation to grow. So, in case the world economy does not fall into a steep and prolonged recession, growing demand will eventually outpace the limited supply of timber products.
Timber companies in Malaysia are in a wonderful position of being the direct producers of raw materials, like plantation companies. And unlike the steel sectors and many so-called oil & gas players, which are merely raw material processors or service providers to the raw materials producers. In the great bull run on commodities prices, only direct raw material producers will enjoy the greatest benefits.
If you believe in the commodity boom, and if you believe in the rise of China and India and many of the emerging markets for many years to come, timber is a very attrative asset class to be had for the long term, and it is so much better to have it when it is at the bottom.
My Dearest Raymond,
Yes, I do understand the reasoning why some folks WANT to bullish on this sector.
1. It's the WORST performing commodity asset.
2. It has a wonderful fundamental issue to sell - limited resources.
However, as you had pointed out in your very first paragraph...
"unfotunately the housing slump in US and slow housing start in Japan abruptly ended the party towards the end of 2007...."
That's the main issue.
That's the very main issue why I am not convinced at all.
Without the demand for the product, how will the sellers jack up the price????
And most of all, without the BOOMING demand of a BOOMING housing market, then I am afreaid the chances are there will never be a TRULY BOOMING market for the timber sector.
You know every booming market will have its laggard or ignored asset. It happens. And I am afraid timber could be the one this time around.
Look at two of the main timber players. Ta Ann and WTK. They had given the vote of confidence in this sector by diversifying into the palm oil sector too. If these big boys are not convinced, why should I be convinced either?
rgds
Actually, it's interesting to compare timber with oil, as prompted by raymond above.
1. It's true timber takes 20-30 years to grow new and replace. But what about oil? 2 billion years to grow and replace? :-) I would say oil is a lot harder to replace than timber, once consumed.
2. Yes, higher timber prices benefit direct producers more since their profit margins are geared. But I wouldn't write off the Oil & Gas players off so quickly, particularly those that are involved in E&P. Since one is comparing long term, imagine a world when more and more oil is consumed. Already, global consumption outstrips supply ("peak oil"). If exploration activities stops, how long will existing stocks & reserves lasts? What will happen to this world when globally, there is insufficient oil? I shudder to think of it, because it is almost certain we will see ridiculously higher levels that will make $120 looks very cheap in comparison. If there is a global shortage, countries will certainly go to war to control oil for their own consumption. The world then may look more like Mad Max than what we know today. So, it's clear that Exploration activities can never stop. The world cannot afford such a scenario to eventuate. It must pursue alternative energy sources as well, but that has its own political problems. I think Raymond may be underestimating the potential impact of global oil shortage on the Oil and Gas industry.
3. On the other hand, if there is timber shortage, somehow, I don't think countries will bother going to war for it. Alternative building materials already exist in abundance.
Of course, this is extremely long term view, and I personally don't invest based on such super-long term considerations. (Some might disagree with me and argue that this might happen sooner and within my lifetime).
Seng.
Post a Comment