KUALA LUMPUR (Jan 6): The wood manufacturing sector's prospects appear to be dimming even with the easing in elevated raw material costs and supply chain issues, as the industry is facing yet another obstacle — slowing furniture demand.
The declining US home sales, normalising pandemic trend as workers return to the office, coupled with increasing risk of a global economic downturn, are weighing furniture demand, said Hong Leong Investment Bank (HLIB) in a report on Friday (Jan 6).
Among the top five export markets for Malaysian furniture in the first 10-month period last year, Singapore registered the largest year-on-year growth of 47.2% but the US remains the largest export market, making up 57.3% of total export value for the period, said the investment bank.
However, it said existing US home sales have been declining amid rising mortgage rates, making it increasingly unaffordable for home buyers there.
“This would inevitably have a negative impact on Malaysian furniture makers given that the US is the largest export market,” it noted.
As workers return to office post-pandemic, HLIB said consumers are expected to shift their spending from buying home goods, like new furniture, to travel and leisure as international borders have opened.
Moreover, HLIB said the weakening of the US dollar against the ringgit is a bane for the wood manufacturing sector as most of its revenues are denominated in the greenback.
“Should global furniture demand take a downturn as a result of economic slowdown while the ringgit continues to strengthen against the greenback, there might be further margin compression ahead for the wood manufacturing sector,” it said.
Therefore, HLIB downgraded the sector to “neutral” from “overweight”, and expects panel board makers like Evergreen Fibreboard Bhd and Heveaboard Bhd to fare better than furniture makers like Lii Hen Industries Bhd and Homeritz Corp Bhd, as the US is not their main export market.
Evergreen’s operations in Thailand and Indonesia cater to the Middle East and Indonesian markets respectively, while Heveaboard’s main export market is Japan, said HLIB.
“These markets are expected to be more resilient compared to the US market and as such, the panel board makers should fare better than the furniture makers as they would not be significantly impacted should there be an economic recession in the US,” it said.