As forecast in our last report Far East log and lumber prices have continued to move steadily upwards and, as yet, show no signs of weakening. While the usual supply slowdown during the new year vacation period and poor weather conditions for logging are cited as reasons for this strong performance, there is little doubt that the overall shortage of logs is a long-term major factor, coupled also with the necessity to cover for the higher prices for fuel and other inputs.
Prices apart, there have been threats of quite significant moves in the region that, if they went ahead, could have far-reaching effects on regional trade flows.
In February The Australian newspaper reported that Indonesia planned to allow clearance of a 5km wide by 200km long stretch of remote and untouched forest on the island of Borneo along the border between Indonesia and Malaysia (Western Kalimantan) in a Chinese-funded project to establish palm oil plantations.
Environmental groups protested that this was just an excuse to log the forest for timber, citing some existing huge areas of abandoned oil palm plantations elsewhere in the country, and other land more suitable than the border area which is quite mountainous and contains 14 of Borneo’s 26 watersheds. Even the Ministry of Agriculture is reported as finding this border region too mountainous for oil palm plantations. It is suggested this project is one of several agreements resulting from a visit to China in July last year by Indonesia’s president. No details of any of these have been released.
There has been a storm of protest, with economic and scientific experts saying this would be both a fiscal and an ecological disaster. The latest news is that WWF, along with other protestors, have lobbied government at the highest level and it now seems unlikely that the proposal will go ahead.
Separately from this issue, there have been strong rumours in recent weeks that the Indonesian government is actively considering the resumption of log exports. Again there has been adverse comment, with economists saying this will merely export timber industry jobs. It is a fact that in the past two years or so the Indonesian timber processing industry has already shed several thousand workers, partially due to the steep decline in the plywood manufacturing sector, which has shrunk by more than 50%.

<b>Indonesian ply mill closures</b>
Many ply mills are now closed and most others are producing at well under capacity. The industry says this is because of log shortages, while the government maintains the fault is that manufacturers have not modernised their machinery and are therefore uncompetitive. The Indonesian decline, with exports down by 26% in 2005, has been balanced, or more likely exacerbated, by higher production and good marketing by Malaysia’s ply industry and the very fast build-up of plywood manufacture in China where plywood exports rose by a further 30% in 2005 and imports fell by 26%.
Malaysian product manufacturing is also hit with log shortages but some observers point out that Sarawak is still exporting very large volumes of logs. Meanwhile, at the same time that log exports are increasing, the Sarawak Timber Association has agreed to consider a request from its Panel Products Committee for an appeal to the state government to allow the importation of logs into Sarawak.
It is not stated from where the logs might be sourced but the only obvious candidates would be West Africa or, perhaps more likely, from Papua New Guinea where, according to the latest ITTO report, log prices are moving lower, in contrast with the continuous increases pretty well everywhere else in the world.
In another industry sector, Malaysian furniture manufacturing has been a mainstay of government policy and produced excellent results in growth of exports and new employment opportunities. Here again a timber supply problem has arisen with higher prices and shortage of the staple raw material, rubberwood. Higher prices for rubber have led to plantations holding on to the older, low producing but still economically viable trees instead of felling and replanting. This has led to a temporary low supply situation affecting the furniture industry.
Malaysian export meranti logs sq and up, now trading US$30 higher at US$245-256/m3 fob, small logs up US$30-35 to US$215-230 and super small up US$20-30 to US$182-195. Keruing sq and up are US$30-35 higher at US$215-230, small and super small also moved up US$30m3.
Kapur sq and up also had a further rise and is US$20/m3 higher at US$190-205. Selangan batu logs are said to be very hard to find on the market, most producers will sell only parcels of combined regular, small and super smalls with only a couple of offers quoting under US$300/m3, even for the super smalls with regular logs priced at upwards of US$330/m3 fob. Once again logs for domestic consumption have moved strongly upwards, increasing by around US$40/m3 following on the rise of US$30 reported at the end of 2005, making meranti logs for domestic processing now close to US$35-40/m3 above export prices. The shortage of merbau is reflected in prices now in the range of US$350-355. However as noted, Papua New Guinea prices reported for November 2005 show PNG export kwila (merbau) logs falling to an incredibly low US$100/m3, down from a reported US$116/m3 last November. It must be asked how PNG exporters can be so far out of step with the rest of the market.
Sawn lumber prices have shown some upwards movement but in general less than the increases for logs, in the main in the range of plus US$15-20/m3 with only merbau putting on US$30/m3. Selangan batu remained stable at just under US$700/m3, sepetir was also unchanged after the rise of US$40 at the end of 2005, while balau managed to put on only a further US$15m3 fob. Domestic prices for sawn lumber within Malaysia also increased again quite strongly with further rises of US$25-30m3.
Plywood prices continued the steady rise that began almost one year ago. Malaysian export prices are up by US$20-25 for 2.7 and 3mm and plus US$20/m3 for 9mm compared with end 2005. Indonesian prices are up around US$20/m3 for all thicknesses.
Indonesia is holding on to its lead as the major supplier of hardwood plywood to Germany but is under pressure from Malaysia and from ply-faced composite boards, now such a strong feature of Chinese exports.

&#8220The Indonesian decline, with exports down by 26% in 2005, has been balanced, or more likely exacerbated, by higher production and good marketing by Malaysia’s ply industry and the very fast build-up of plywood manufacture in China whose exports in 2005 rose by a further 30% while imports fell by 26%”

<b>Active buying</b>
With the exception of the anomaly of Papua New Guinea export log pricing, there appear to be no signs of weakness in log, lumber and plywood prices. China and India are very actively buying at current levels and, although the Japanese plywood industry is still complaining and hoping to resist the increases in log prices, there is little doubt that the immutable laws of supply and demand will prevail and it seems entirely likely the gradual upwards price trend will continue at least through the second quarter.