Little has changed in the Far East timber industry through the first half of the year. Trading conditions remain dull, prices are largely static or under downwards pressure and volumes are, at best, only moderate to low. Buyers are still cautious and purchases are mostly in small volumes.
Japanese buyers did take up some of the overlying small logs but are now reported to be out of the market for the time being. China also is holding off log purchases and South Sea log prices generally have declined by between US$5-10/m³ over the past two months although SQ and up kapur and selangan batu have held firm with a much wider price range than usual, an upwards variation of around US$10-15/m³ over a base price close to US$140-150/m³ fob. Keruing small logs also held firm while the SQ and up moved down some US$5 lower than May/June levels.
Japan forecasts lower log imports this year, continuing the steady decline over the past few years.
Sales dried up
In the lumber sector, prices for DRM have declined between US$5-10/m³. A few offers are on the market at prices virtually unchanged from May/June but sales to the UK and the Continent are said to have dried up during the traditional summer holiday season. In Peninsula Malaysia reports are that many concessionaires in the main logging areas have ceased operations, at least until trading prospects improve.
As can be seen from the ITTO/MIS price index graph, there has been a steady decline in DRM prices, the slowdown in some European economies and the problems in the US furniture industries are the most likely causes. The US economic downturn may be almost as much perceived as actual but there is no doubt of the effects on global trading sentiment and on the US domestic furniture sector where large producers are taking extended vacations, laying off staff and restricting working hours. All manufacturers forecast even lower sales following a decline of retail sales of 4% in the first quarter of 2001 compared with last year.
By contrast, the UK furniture industry increased sales in the first half of the year, while its Continental competitors followed the US pattern with lower sales and more difficult trading conditions. Some US manufacturers and wholesalers are looking to make closer ties with Asian producers to streamline production and develop new designs.
Far East timber producers also point to the reduced number of actual and potential bulk lumber buyers as mergers in the Netherlands and the UK consolidate buying power into fewer hands. From the seller’s point of view this means fewer stockholders, lower overall inventories and an increased tendency to buy more often in smaller volumes on a just in time basis.
Major news in the region concerns Indonesia where president Wahid has been replaced. The rupiah has been in free fall over the past weeks because of the political situation but has now improved from R11,148 to the US dollar on July 20 to a R8,900 last week. Indonesian suppliers are recommending prompt purchases as they feel prices will increase as the rupiah regains value.
Sea freight from Indonesia to Australia is set to increase from August 1 by US$200 per 20ft container, with the expectation that a further increase will be applied as the rupiah appreciates.
Advance payments
The Indonesian government recently brought in a policy requiring timber companies to make advance payments amounting to three years’ contribution to the reforestation levy. The companies are protesting that this will bankrupt many operators and that all would find severe difficulty in financing the huge sums involved.
The minister for forests said the new policy was aimed at cracking down on illegal logging activities carried out by ‘unscrupulous forest concession holders’. It is not clear how this relates to last year’s reports that much of the large volume of illegal logging is carried out by ‘entrepreneurs’ in the local areas with the connivance of some officials and with payments direct to villagers and landowners.
The industry might also have reservations regarding the final application of the large sums collected for the reforestation levy when recalling that a few years ago, when the fund stood at over US$900m, the then president ordered that more than US$300m be taken out and given to an Indonesian airplane manufacturing company.
As a condition of the economic rescue package the IMF required that the reforestation fund be incorporated into the government formal budget. While this may regularise the fund, there is no guarantee as to what, where and when disbursements will be made.
The IMF also insisted on freeing up log exports which seems only to have kept tropical log prices continually depressed and ignoring that the capacity of the Indonesian timber processing industry is well in excess of the permitted annual allowable cut.
Once again, downstream manufacturers are complaining of log shortages and now are joined by the Malaysian industry in their contention that logs exported to countries such as China are used to make products which are then exported back to their original customers, losing them the value-added revenue.
Plywood depression
The plywood sector shows no signs of moving out of the very depressed market. Japanese manufacturers are still steadily reducing production, citing the low price on their domestic markets, with heavy competition not only from imports but from the increasing inroads made by MDF, OSB and other board products. The Japanese industry is not alone as virtually every plywood manufacturing region is in a similar situation, with low prices, low demand and strong competition. Malaysian export plywood prices are down some US$5-10/m³ while Indonesian prices are just US$5/m³ lower over the past quarter and demand is still very weak.
Brazilian exporters have been able to hold prices fairly steady to their traditional US markets – even into Europe – though their export pine ply has dropped by US$5m/³.
Compounding the low demand and price pressures have been problems of the weaker Japanese yen and the large fluctuations in the rupiah which again have made for difficult trading decisions.
Looming on the horizon in 2002 is the start of the European changeover to the euro. Forecasts are that the US dollar will stay strong while the euro continues to be weak. No doubt both buyers and producers are already trying to predict how this will impact on prices, but with Far East exporters most likely to continue to insist on a dollar base.
No sector of the industry is yet able to forecast when there might be some improvement in trading conditions, either price or volume.
Overall, prices have moved down marginally over the past quarter but producers and traders have held very firm under the poor market worldwide, not least because there is no margin in which to make any significant price reductions. In any case, with low demand it is not likely that price reductions would do anything to stimulate buyers to speculate on increased volumes.
Producers have become accustomed to tailoring their output more closely than ever to match market demand.
Testing time
The current situation is a very testing time for the industry but there is some hope that at the end of the third quarter and into the fourth, European markets will pick up to replenish low inventories.
Many economists also feel the US economy will show the expected strength to pull through to restore business to the strong growth cycle of the past few years.
Related Files
Meranti and Keruing Log FOB Price Trends
Dark Red Meranti Sel & BTR25mm FOB Price Trends
Tropical Plywood FOB Price Trends
