Unfavourable outlook for Malaysia’s wood-based manufacturing sector

As the second half of 2018 approaches, analysts have projected that the wood-based manufacturing sector will remain pessimistic as the weaker ringgit currency is insufficient to stop the negative factors such as potential minimum wage increase and high rubber wood prices.

The research arm of Hong Leong Investment Bank Bhd (HLIB Research) revealed that the new government has pledged to increase Malaysia’s minimum wage from US$247.50(RM1,000) per month to US$371.20 (RM1,500) per month.

“While it remains to be seen if the minimum wage hike would materialise, a hike is negative to the sector’s earnings, given its heavy reliance on labour.

HLIB Research said that with all things held constant, every RM100 per month increase in minimum wage is set to lower the financial year 2019 (FY19) net profit forecasts by one to 14 per cent.

With regards to the prices of rubber log wood, there have been holding up due to shortage of supply, and this does not bode well for the sector.

The research arm further noted that among the wood-based players, Evergreen Fibreboard Bhd will be hit the greatest by the persistently high rubber log wood prices.

It said that prices for Evergreen’s operations in Thailand, which makes up 40 per cent of the group’s total medium density fibreboard (MDF) capacity, has almost doubled in between the second quarter (2Q) and 3Q from supply shortage due to rainy season.

Meanwhile, oversupply of particleboards in Thailand, due to 10 additional new production lines being added since mid-2017, has resulted in prices falling since 3Q17.

The research arm believed prices of particleboard will likely continue to be lowered in the coming quarter.

The research arm also pointed out that while HeveaBoard Bhd managed to maintain prices of its particleboard as the quality of their products is superior, it may soon have to lower its prices as the price gap between premium and mass market products are narrowing significantly.

HLIB Research showed favourable predictions for the furniture players over the engineered wood players, as they are not involved in an intense price war.

“Moving forward into 2H18, the furniture makers will be facing another hurdle with the potential surge in labour cost…However, we opine that the surge in labour cost can be partially cushioned by a stronger US dollar against the ringgit, lower material prices (particleboard) and previous upward average selling price adjustment.”