Summary
• Demand from the Asia-Pacific region will offset the falling interest from the UK, Europe and the US.
• The economic slowdown is just beginning to impact on Far East prices.
• A rally in demand in July brought some price stability.
• Chinese demand for logs and lumber remains strong.

It is hard to believe that only four months ago the indicators for prices of Malaysian and Indonesian logs and lumber were showing an upwards trend. Our Asia report expressed some doubts on the justification for too much optimism in view of the already difficult finance, housing and construction situation in the UK and Europe and events have proved this to be the more correct view of market prospects.

Close study of statistics available later revealed that already by June, log and lumber prices had shed a few dollars and were back down to the April figures. The initial rumbles portending the recent financial hiatus followed on very quickly and, although politicians and pundits stress the problems are global, the impact on the timber trade appears to be much more serious in America and the UK, somewhat less serious in a few countries in Continental Europe and much less of a domestic problem in the Asian economies, at least at present. The West African industry saw the impending slowdown at an early stage and took strong action to close logging concessions, sawmills and even veneer mills.

Impact on prices

Judging only on a price basis it would appear that the full impact on Far East timber industries is only just beginning to be more strongly felt. Meranti SQ and up logs are only US$2-5 lower than in April and the other grades also down only US$2-3/m³. Price movements in sawn lumber and in plywood are, according to statistics, also marked by very small price reductions. It is not clear if these prices are indicative of a baseline from which to begin negotiation or are showing stability and traders’ determination to maintain firm prices through a difficult trading period.

Of course, Malaysian and Indonesian exporters have long had very good markets in Middle East countries where the current financial problems are not apparent and massive development projects continue unabated.

Other exporting countries, including even Brazil, are attempting to target this large and stable market, but high freight rates, longer and more complex communication problems and other constraints make this an uphill struggle for any newcomers. Qualities, preferred species and methods of trading can be very different from the more formal systems in place in Europe and elsewhere.

In July there was a very short-lived rally in demand. Japanese housing appeared to revive, albeit from a period of consistently lower and lower starts, so the upturn was from a very low base. It soon petered out and did little to stimulate demand for timber products.

Indonesian plywood also came into stronger demand from China, possibly due to the reconstruction after the recent earthquake, while demand from Europe for Malaysian plywood also experienced a sudden upturn in volumes shipped, in part due to replacing the lower imports of Chinese plywood.

Price stability

Although these proved to be only temporary increases in demand, there was a very positive effect on price stability for Malaysian and Indonesian exporters. Even chipboard and MDF exports managed a price increase when, at the time, European manufacturers were already well into production cuts and price discounting. This surge was soon over and prices for board products in the region are now down again and trending weaker. The long-term trend for a steady decline of timber imports into Japan is still evident.

Turning to the markets in China, demand for logs and lumber is strong. The increase in the Russian log export tariff led to a substantial fall in China’s imports of softwood logs, and the tariff rate is to increase again in January 2009. Although China’s own forest output is increasing very quickly, by 12-18% year-on-year because of the huge investments over many years in plantations, the immediate shortfall in supply has to be made up. One result is joint venture plans to open sawmills and processing operations in Russia. Meanwhile, in the short term, demand from China will be filled by increased imports.

Indonesian demand

A recent ITTO Tropical Timber Market report mentions that the Indonesian authorities forecast demand for forest products will reach 30 million m³ in a few years’ time, while the current permitted harvest is limited to 9 million m³ and the industry has a capacity of 22 million m³. This imbalance between the permitted harvest, demand and the industry’s capacity is not new and has been well known for many years but it must surely lead to difficulties in containing illegal activities in the forest sector.

Other news is of Malaysia’s intention to sign up to a Voluntary Partnership Agreement (VPA) with the EU, which it is expected will provide Malaysian timber products with improved access to the EU markets.

The discussions on carbon capture and Reducing Emissions from Deforestation and Degradation (REDD) are ongoing in several directions, with developed and developing industrial nations keen to be able to offset their excess emissions through purchases of carbon credits linked to forest conservation. The forested countries seem less enthusiastic about carbon trading as, in most of them, the growing population looks to forest-based industries to provide employment and improvements in their lifestyle. This reluctance is compounded in some countries where the forests belong to the people, not to their government.

Steady trade

The downturn in tropical hardwood business is hitting hardest in the UK, Europe and the US while there is good steady trade in China and the Middle East – and also in the ‘quiet man’ in the industry, India, where almost all business is expanding quickly. For exporters, these importing countries are the toughest negotiators and prices have weakened even though demand is close to normal.

Furniture manufacturers are beginning to feel greater effects of the slump in demand caused by the reduction in consumer credit and reluctance to commit to new purchases when job losses are becoming an increasing threat. The impact has already become apparent in Italy where imports of tropical timber and veneer are curtailed. The US furniture market as well as the millwork sector have slowed and will affect the industry in both China and Malaysia.

At this stage it is not easy to determine exact prices for Asian timbers. There has been remarkable firmness in Far East markets even though West African producers had been forced into acceptance of lower prices over the past three months. The strength of trade within the Asia-Pacific region has offset to a great extent the lower interest from Europe and for the foreseeable future this scenario is not likely to change.