Research house expects Indonesia to boost supply of plywood


KUCHING: Indonesia, the world’s second largest exporter of tropical plywood, is expected to boost supply of the timber product this year due to the weak rupiah.

According to CIMB Research, the 20% depreciation of the rupiah against the US dollar over the past 12 months, lowers the production cost of Indonesian plywood producers.

“This may lead them to boost supply. We believe a higher supply will lower plywood prices,” it said in a report on the outlook of the timber sector.

As such, the research house has lowered its average plywood price forecast for this year by 3% to US$550 per cu m in anticipation of higher supply from Indonesia.

Reviewing last year’s performance of the plywood market, CIMB Research said CIF (cost, insurance and freight) prices of Malaysian plywood to Japan averaged US$557 per cu m in the first 11 months, which was lower than its forecast of US$566 per cu m for the year.

From a three-year low level of US$532 per cu m in January as Japanese timber traders slowed their purchases amid a volatile yen, plywood prices recovered in May as the yen stabilised at 97-100 to the US dollar.

“On top of that, Japan’s housing starts recovered strongly in that month as Japanese home buyers rushed to beat the expected rise in sales tax from 5% to 8% in April-2014.This increased the demand for plywood and boosted its prices.”

Moreover, it has anticipated lower housing starts in Japan this year as part of the housing demand had been satisfied in 2013.

“We believe plywood prices have peaked in 4Q13 as Japan’s housing starts should decline in 1Q14 after a seasonally-strong 4Q. On a monthly basis, plywood prices were the highest in October (US$598 per cu m) and fell 2% month-on-month to US$585 per cu m in November.”

CIMB Research has expected Malaysia’s plywood supply to stay tight this year as fewer logs would be left for plywood processing after the Sarawak government increased log export quota from 40% to 50%.

Exporting logs, it said, was more profitable than processing them into plywood.

After downgrading its average plywood prices by 3% to US$550 per cu m in 2014, CIMB Research has subsequently cut the earnings per share (EPS) of timber players under its coverage, including Ta Ann Holdings Bhd and Jaya Tiasa Holdings Bhd, by 1% to 10%.

Ta Ann is the research house’s top pick stock for the timber and plantation sectors. Despite the lower plywood price projections in US dollar terms, it has expected Ta Ann’s earnings to improve this year, driven by a weaker ringgit ( as timber prices are denominated in US dollar) which would lift its timber revenue.

CIMB Research expects the commissioning of Ta Ann’s plywood production in Tasmania in mid this year to turn around the group plywood division as the Tasmanian operations had been unprofitable due to the high operating cost.

The company has received a A$7.5mil grant from the Tasmanian government to install the plywood production line at one of its Tasmanian veneer mills.

“Plywood produced by the new line will be marketed in Australia.

“This should lower its transportation costs as it will no long need to ship the veneer to Sarawak for processing,” said the research house.

It also expects Ta Ann’s 2014 earnings to be supported by stronger crude palm oil (CPO) prices.

“We forecast CPO prices to average RM2,700 per tonne in 2014,14% higher than RM2,371 per tonne in 2013.

“Ta Ann should achieve higher fresh fruit bunches (FFB) production this year as it young estates (average age of 6-7 years) gradually enter into the prime production age of 9-11 years.

“We project higher FFB output and better CPO price could lift Ta Ann’s plantation pre-tax profit by 104% to RM129mil in FY14,” it added.

CIMB Research said Ta Ann group commissioned its second CPO mill two months ago, and this would help to reduce the transportation cost of the FFB.

It said the group had targeted to plant between 3,000ha and 5,000ha of oil palm estate this year to raise its total planted areas by 8% to 14% from 35,345ha at end-2012.

Ta Ann share price jumped by 22% to close at RM4.17 last year from RM3.41in 2012. The stock is currently trading around the RM4.10 level.

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