Increase in timber premium and cut in logs export quota to blame

KUCHING: A hefty increase in timber premium and a drastic cut in logs export quota have dampened the earnings of Sarawak timber companies.

The policy changes, which were effective since July 1, saw the Sarawak government raising the timber premium by more than 6,000% to RM50 per cu m from 80 sen per cu m for all species of logs from hill forests and logs of hill species from agro-conversion areas.

The logs export quota was further reduced to 20% from 30%, a move by the state authorities to ensure more logs are reserved for the wood processing industries. In line with sustainable forest management to regulate timber harvesting activities, Sarawak’s annual log production has shrunk in recent years.

The negative impact of the policy changes was reflected in the weak quarterly results of Sarawak’s listed timber entities.

In the third quarter to Sept 30, 2017 (3Q17), WTK Holdings Bhd said the drastic hike in timber premium rate had pushed up logs production costs, thereby eroding profit margin.

Despite a sharp increase in logs sale by RM15.6mil or 50.1% compared with 3Q016, the group’s timber segment pre-tax profit fell by RM2.2mil to RM2.6mil from RM4.8mil in 3Q16 or a drop of 45.8%.

The reduction was mainly attributed to the sales of logs, which were down to RM3mil from RM5.3mil or lower by 43%.

“Production cost of logs is higher by 13.3% and plywood by 7.1%, resulting from the hike in hill timber premium and price increase in diesel,” said WTK in notes to its latest financials.

The company attributed higher sale volume of logs in the quarter under review to favourable weather conditions which had facilities timber harvesting activities and logs transportation.

In the first nine months, WTK’s log production rose to 451,192 cu m from 427,375 cu m in 2016 corresponding period, up by 5.5%

India accounted for 97% of WTK’s logs export while Vietnam the remaining 3%.

According to WTK, as India’s economic growth is forecast to remain robust due to rising wages and increasing private investments that will continue to drive the country’s economic activities, this bodes well for its logs export.

Export log prices have remained firm for years due to prolonged supply shortfall because of production cut in Sarawak. International tropical logs prices have surged after one of the key producers, Myanmar, banned logs export in 2014.

Ta Ann Holdings Bhd reported a 55% plunge in its log export volume in 3Q17 from the corresponding period last year.

“The drop in logs export volume is resulted by restricting logs export quota of 20% that took effect in July 2017,” the company said in its latest quarterly results.

“The ongoing timber certification exercise is the other factor affecting Ta Ann group’s low logs production.

In the July-September quarter, Ta Ann harvested 57,747 cu m of logs which was a drastic drop from 114,849 cu m in the corresponding period last year or down by 57,102 cu m, according to the company’s monthly production figures filed with Bursa Malaysia.

To offset the drop in logs production, the group has strategised in employing higher plantation and certified wood components in the production of plywood by utilising mature plantation logs as well as imported eucalyptus veneer as raw materials.

Ta Ann, which recorded a 37% drop in the sales volume of plywood products in the quarter under review, expected the timber market to rebound going forward. Its optimism is based on the low plywood inventory in Japan, coupled with the infrastructure construction works for the coming Olympics which the country is hosting.

The underperformance of the timber segment has resulted in Ta Ann posting lower group revenue and net profit of RM308mil and RM30.3mil respectively, down from RM349.9mil and RM57.6mil respectively in 3Q16.

The group has reported better performance from its oil palm segment due to improved sale volume and higher average selling prices of fresh fruit bunches and crude palm oil during the period under review.

Subur Tiasa Holdings Bhd also blamed the reduction in logs export quota for the 46% drop in its logs sale for financial year ended July 31,2017 (log export quota was reduced to 30% as at end-June 2017 from 40% in 2016 and further cut to 20% from July 1,2017).

In the January-September 2017 period, Subur Tiasa’s logs production plummeted by 78% to 41,297 cu m from 190,178 cu m in the same period last year.

Group managing director Datuk Tiong Ing, in an annual review of the group’s timber business performance, said the regulated supply of timber had resulted in a 38% reduction in export plywood sales year-on-year.

On the outlook for the timber business, she is optimistic about the export log price due to sustained international demand and tight supply in Malaysia.

In 3Q17, Jaya Tiasa Holdings Bhd registered a 2% decrease in the revenue of its timber segment to RM90.2mil but recorded RM1.6mil in pre-tax profit, a sharp improvement from a loss of RM7.6mil in 3Q2016.

Contribution from the oil palm segment to Jaya Tiasa group bottom line has overtaken that of the timber segment and contributed RM165.5mil in revenue and RM44.7mil in pre-tax profit in 3Q17 against RM154.3mil and RM42.6mil respectively in 3Q-2016.