That's some funky looking plumbing system you have there.
I guess the plumber missed the class on, no plumbing should be run in outside walls, or left exposed outside of a wall.
You have what looks like Smart Siding, sold at Lowes, it's cheap partical board with a coating on it.
I would not use cedar, it will stain and rot over time.
I'd cut out the old rotted wood and seal the cuts with at least two coats of paint then use 1 X 6 (at least) vinyl lumber instead of cedar, with a strip of Z moulding up under the siding you have now.
Even that will just be a temperary fix, as that type siding left exposed will still wick up water and rot out.
You can cut it out by snapping a chaulk line first then use a ciruler saw set to the thickness of the siding to make your long cuts and an ossilating saw to cut out the ends and around that plumbing.
If it was my house I'd cut out the rot, replace with new OSB, add Tyvek then vinyl side the house.