• A light flurry of log prices late last year has settled as the yen has stabilised against the US dollar.
• The weather in Sarawak has been poor for logging and Chinese New Year is also likely to reduce activity.
• Higher freight rates, fuel costs and currency surcharges are not encouraging European buyers to close new business.
• Shippers are resisting UK and European pressure to reduce lumber prices.
• Strong demand from China and Vietnam has kept some log prices firm.

The reported slowing in the Far East timber and product markets in the fourth quarter of 2007 turned out to be less drastic than had at first seemed likely. Indications in early September to some extent relied on the plywood trade, as Japanese importers and traders felt the internal plywood market had stagnated and the resulting back-up of supplies in the pipeline caused lower imports.

There were also some concerns over the volumes of imports of Chinese plywood into Europe and the possibility of sanctions being imposed. Traders thought all this appeared likely to affect log prices, not only because of the relatively moderate to high domestic stock levels in Japan and China, but also for the possible effects on new business for PNG, Sarawak and West African log suppliers.

This situation simmered through October but by early November the reported Malaysian log prices had managed to squeeze an overall rise of US$2-3/m³ for SQ and up and small logs and up to US$5/m³ for super small. This after holding on to the moderate increases already achieved in September.

Currency movements

This modest price rally was not fully sustained and by the end of November some log prices had fallen back one or two dollars to the September levels and were mostly unchanged through December, with only keruing small and super small US$2-3/m³ lower. The situation has stabilised as the yen has appreciated against the US dollar, offsetting the recent increased ocean freight costs, leading to status quo in terms of import prices. Japan still reports high internal log stocks but the plywood industry seems to have recovered from the downtrend and the market has improved with even some minor gains here and there.

On the supply side, there are no new initiatives to report, however, the weather for Sarawak logging has been very poor since mid-November and, with Chinese New Year to be celebrated early in February, there are reports that logging activity is low and some loggers are content to wait and hope for better weather in mid-February, after the new year vacation, before resuming full operation.

Although there is downwards price pressure for lumber from UK and Continental importers who are finding credit more expensive and less easily available from banks, shippers are being very firm on price and also refuting buyers’ efforts to delay shipments for existing contracts.

Increased freight rates

Following the global trend and very strong demand for shipping space for Europe by exports from China and Vietnam, freight rates have increased and this, plus the fuel currency surcharges, also are proving disincentives for European buyers to close new business.

The continued strength of demand from China and Vietnam has kept prices firm and even on a rising trend for certain log species such as selangan batu, kapur and keruing. Some processing companies continue to question the policy to carry on exporting logs of these selected timbers that would bring better financial and infrastructural returns as secondary and tertiary downstream products.

Supply of logs to mills is tight and prices very firm and processors feel there is currently every reason for them to maintain prices even though UK and Continental importers are forecasting much reduced demand for the first quarter of 2008.

Climate change

The recent Bali Climate Change conference made some references to forest resources with the acronym REDD (Reduction of Emissions from Deforestation and forest Degradation) – a process which in some way is to be incorporated in the Kyoto Protocol. Most of the reported wording on this is the usual abstruse UN-speak on the lines of ‘supporting capacity building’ plus ‘methodological issues’ and ‘facilitating technology transfers.’ The timber industry will have noted in similar contexts the proposals that huge carbon emitting businesses can buy carbon credits from countries that have large forest resources and which say that, in return, they will conserve some of this forest. As yet there seems no fixed method of assessing the size of the forest relating to a volume of carbon not to be emitted, nor for how long this forest is to be preserved.

The Jakarta Post newspaper recently included a statement by the Indonesian vice-president to the effect that western countries are to blame for deforestation and illegal logging in Indonesia. This allegation was slightly mitigated by the admission that some regional government officials and others had been involved.

A controversial factor not usually mentioned in discussions of illegal logging is that the financial returns generated by illegal logging are most often enjoyed in cash, on the spot, by the local populace and communities, whereas the royalties, taxes and profits for large scale permitted logging go to governments and the large, remotely-based timber companies. This, probably unpopular, fact has been recognised openly only recently.

Lumber prices also have been quite firm although some West African exporters have concerns they may lose business because kiln dried meranti GMS FAS is said to be priced lower than competing khaya, sipo and other African red timbers. However, with the confusing situation that log supply in Malaysia is tight and log prices firm to increasing while European and Continental buyers are expecting tougher time ahead and wanting lower prices, it seems producers and exporters are prepared to sit tight for the time being, at least through January and February.

Plywood export prices

As with lumber, Malaysian and Indonesian plywood export prices have wavered marginally up and down through the last quarter of 2007, ending up pretty much the same over a four month period, possibly only a difference of US$2-3/m³ either way but showing stability and a degree of firmness in spite of pressure from buyers and the steadily increasing competition from China.

A news snippet in ITTO’s Tropical Timber Market report was a visit to Brazil by a Chinese delegation discussing plywood. Statistics show that Brazilian plywood exports to its major market, the US, have fallen hard while China’s have grown exponentially. Apparently the advice given by China to Brazilian manufacturers was that they should “look for new markets or increase value-added products”. We are not told how happy the Brazilians were to receive this advice.

The prospects for the industry in the first quarter are more than usually difficult to forecast. Right now, Far East exporters are advising their buyers that they are justified in passing on to them the increases in freight and other costs and that logging conditions have kept supplies low so that there is no immediate pressure to close new business at any lower than current prices.

Buyers in the US and Europe are nervous because of the tighter credit and the possible slow down in their domestic housing markets and Continental buyers saying they expect first quarter demand to be down by up to 30%. Exporters are prepared to wait until after Chinese New Year to assess if there is to be any substantial slow down in business.