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<\/a><\/p>\nThe rise in agricultural commodities prices will be to a lesser extent and duration, but it is something that will be welcomed by Malaysian plantation companies as the change in Beijing\u2019s policy could help raise exports of crude palm oil (CPO) at good prices and offset the lower intake year-to-date.<\/p>\n
It could support the current CPO price levels for longer and reduce high local stock levels which have hit 2.4 million tons in October (31% higher year-on-year) due to Indonesia\u2019s aggressive push to clear its own high stock levels ahead of an anticipated global economy weakening in 2023.<\/p>\n
While the China market moving event is some months away, likely at the end of first quarter of 2023, Malaysian planters need a sustained high price for CPO to cover rising cost pressures.<\/p>\n
The Covid-19 pandemic has raised input costs and exposed the soft underbelly for the industry which is the reliance on manpower for harvesting.<\/p>\n
The shortage of labor in the sector, estimated at about 55,000, has led to a fall in the yields in the country. While Putrajaya has moved to re-allow the recruitment of manpower from abroad post pandemic, the outcome of the general election could determine how quickly that can be achieved.<\/p>\n
Last year, Malaysian CPO production was 18.1 million tons as compared with nearly 19.7 million tons in 2018. This translates to a fresh fruit bunch yield of 15.5 tons or 3.1 ton CPO per ha. This is a shortfall of nearly one ton of oil per ha or equivalent to a loss of five million tons of CPO considering the country has a mature land bank of 5.2 million ha.<\/p>\n
How much was that in loss of revenue?<\/p>\n
Based on the average CPO price in 2021, the five million tons of CPO loss equated to a loss in revenue for CPO production of RM22bil.<\/p>\n
\u201cThe lower production for the past two years was largely influenced by labor issues. The oil palm sector is highly dependent on foreign workers. The temporary suspension of the workers during the Covid-19 pandemic years had significantly affected the production of palm oil.<\/p>\n \u201cThe severe shortage of labor had not only disrupted the harvesting process, it had also affected the manuring program of the estates as the existing workers were redeployed to focus on harvesting. Since the temporary suspension of foreign worker hiring has been lifted, the production is expected to improve.<\/p>\n \u201cHowever, as the manuring program was disrupted, this might limit the improvement in production because the impact of manuring generally can be seen in 16 to 18 months,\u201d Datuk Dr Ahmad Parveez Ghulam Kadir, the director-general of the Malaysian Palm Oil Board (MPOB) tells StarBizWeek.<\/p>\n This year is set to be another low-yielding year for the industry. The CPO production from January to October stood at 15.15 million tons, up marginally by 0.8% compared with the same corresponding period of 2021.<\/p>\n For the full year, the number could hit 18.2 million tons \u2013 marking the third consecutive year of no growth in CPO production.<\/p>\n The loss in yields could cost the industry a total of RM20bil in revenue this year at current price levels.<\/p>\n Malaysian Palm Oil Association (MPOA) CEO Joseph Tek says local CPO production is not expected to post any strong production growth versus past decades going forward.<\/p>\n \u201cThere is already a dearth of new mature areas following significant slowdown in new oil palm plantings. In addition, the reduction in fertilizer application over the last few consecutive years, coupled with erratic weather patterns will exert negative impacts on palm oil yields,\u201d he says.<\/p>\n Fortunately, for many planters, the high price of CPO has enabled them to mask the loss in yields and higher costs of inputs like fertilizers.<\/p>\n Improved earnings<\/strong><\/p>\n The improved earnings of plantations companies like United Plantations Bhd, IOI Corp Bhd (IOI), Kuala Lumpur Kepong Bhd (KLK) and Sime Darby Plantation Bhd (SDP) this year are driven by upstream operations enjoying higher CPO and palm kernel oil prices.<\/p>\n CPO price traded 23.1% y-o-y or RM988 higher to RM5,264.50 per ton from January to October. The highest monthly average CPO price was RM6,873 a ton in May following Indonesia\u2019s move to curb exports after sunflower seed oil supplies from the Black Sea were cut off from the market.<\/p>\n The CPO price is also influenced by the higher soy oil and crude oil prices, and the weaker ringgit against the US dollar.<\/p>\n While CPO price may have weakened since the price peak, it remains supported by the elevated soy oil and crude oil prices after the Organization of the Petroleum Exporting Countries and allies moved to keep crude oil prices high through production cuts.<\/p>\n Soy oil is trading at a historic US$800 (RM3,640) premium to CPO following the fall in CPO on bearish stock levels.<\/p>\n \u201cUS soy oil price is mainly driven by crude oil with nearly 40% of the American bean oil going into domestic biodiesel. Strong crude oil price is supporting soy oil, whereas palm thrives in the edible sector. US soybeans prices have been firming mainly on adverse weather trade (hot dry weather during the harvest period in September) and this supported the soy complex (bean, meal and oil) pricing keeping soy oil elevated,\u201d says Sathia Varqa, owner and co-founder of Palm Oil Analytics.<\/p>\n He says the negative crush margin at the world\u2019s largest soy oil exporter Argentina has tightened global supply, causing soy oil to push higher relative to CPO as Argentinian farmers are holding back sales.<\/p>\n Varqa expects the premium to revert to historical levels of US$100 to US$200 (RM455 to RM911) levels once the greenback eases but warns the ringgit may weaken further against the dollar.<\/p>\n While the discount may narrow, MPOA\u2019s Tek expects CPO prices to hold above the RM3,000 a ton level due to local driven factors.<\/p>\n \u201cThe RM3,000 per ton figure can be considered as the new norm, as cost of production for some plantation companies is already at this level set against their realized oil yields. There can still be a dip in prices set against global supply-demand of any commodity businesses as price takers and not price makers \u2013but perhaps not in the foreseeable future,\u201d he says.<\/p>\n Breaking the RM3,000 level will also attract good demand, Tek adds.<\/p>\n Price volatility<\/strong><\/p>\n Varqa expects CPO price to remain volatile and subject to weather vagaries and the performance of other competing vegetable oils which are seasonal crops whereas palm is a perennial crop.<\/p>\n \u201cA fall to RM2,000 per ton for CPO will be a disaster to plantations facing massive rise in input cost driven by fertilizers and crude oil, not to mention hike in interest rates and weaker ringgit inflating repayments on borrowing on plantations that are highly leveraged,\u201d he says.<\/p>\n Ahmad Parveez of MPOB says CPO price is unlikely to fall below RM3,000 per ton in the short term unless there is a sudden decline in soy oil to below US$1,000 (RM4,549) per ton but it is difficult to predict if the RM3,000 per ton level will be a new normal for CPO prices.<\/p>\n The benchmark CPO futures contract on Bursa Malaysia Derivatives closed the trading week at RM3,845.<\/p>\n Cost pressures may not ease too quickly either.<\/p>\n A fertilizer importer and distributor says the local market was short by some 1.2 million tons of fertilizer this year as the high prices on the global market saw main distributors buying less with their limited financial means while the Ukraine-Russia conflict made sourcing harder despite fertilizer from Russia not being put under sanctions by Western powers.<\/p>\n The price of potash for instance had jumped to US$1,000 (RM4,550) a ton in June while ammonium sulfate went as high as US$640 (RM2,914) a ton after hostilities broke out before settling at US$745 (RM3,393) and US$500 (RM2,277) respectively.<\/p>\n \u201cThe local market is likely going to remain short next year because the main local distributors are happy to make more money selling less at higher prices. The high CPO price means plantations companies can afford to pay while the bad pay master will see supply curtailed.<\/p>\n \u201cSmallholders have generally stopped application as they would rather just make as much from selling the fruit,\u201d he says.<\/p>\n Russia\u2019s move to weaponize energy supplies to Europe will hit fertilizer production levels there and keep fertilizer prices high on the global markets in the foreseeable future.<\/p>\n Tight market<\/strong><\/p>\n While the United Nations (UN) sponsored grains and fertilizer trade from the Black Sea region will ensure fertilizers from Russia, the world largest exporter, have market access, the sanctions imposed on logistics and financing will impede exports and keep the fertilizer market tight, says the importer.<\/p>\n Varqa forecasts Malaysia\u2019s 2023 CPO production to be 18.5 million to 19 million tons based on non-reduction in the application of fertilizer especially among the smallholders, no adverse weather impact and on labor supply situation improving. The stagnating yields and constraints on plantation expansion due to commitments to policies such as No Deforestation, No Peat and No Exploitation and Roundtable on Sustainable Palm Oil, leave plantations with mergers and acquisitions (M&As) for growth, according to Tek.<\/p>\n Nixon Wong, executive director and chief investment officer of Tradeview Capital Sdn Bhd, says on a price-to-book perspective, the plantation sector is trading at an average of two times price to book (PB) during pre-pandemic period but valuations have compressed to around 1.4 times PB due to issues related to environmental, social, and governance (ESG).<\/p>\n \u201cNewsflow regarding the European Union (EU) ban of palm oil to be used in biofuel production by 2030 and the US Customs and Border Protection ban palm oil import from selected Malaysian companies are among the factors behind the valuation compression,\u201d he says adding the one-off nature of Cukai Makmur, has a limited implication on stock valuation of planters in general.<\/p>\n The discount could be narrowing as a recent CGS-CIMB Research report on fundflows shows foreign funds are net buyers of companies like KLK, IOI and SDP on a year-to-date basis while local institutions were net sellers.<\/p>\n \u201cValue has emerged, however, we believe any re-rating of the plantation industry will hinge on the direction of the palm oil prices. Should the price of palm oil remain range-bound, we think that plantation stocks could remain a value trap, although investors could take comfort in their 4% to 5% dividend yield which will act as a valuation floor as well in the event that CPO price falls,\u201d he says.<\/p>\n The fund inflows into bigger plantation names in Malaysia are based on fundamental considerations such as positive short-term earnings profile, the weaker ringgit which may provide support to CPO prices (demand shift from premium soyoil), easing oversupply issue in Indonesia and rising demand from biofuel usage in the South-East Asian region, says Neoh Jia Man, fund manager at Tradeview Capital.<\/p>\n Neoh believes profit-taking activities among local institutions may explain their net short stand as they seek to reduce risk ahead of the general election.<\/p>\n \u201cThere is no universal agreement on whether palm oil should be banned as part of the ESG investing, and note that even among the developed markets, only around one-third of their asset under management are being subjected to ESG policy. Hence, there are still inflows from foreign funds which have no ESG constraints, in our view,\u201d Neoh says.Nixon says any potential M&A involving plantation companies would be valued at an average PB of 1.7 times as a fair valuation point, but at a discount to historical average PB of two times pre-pandemic when less ESG policies were in place.<\/p>\n With the world\u2019s population crossing the eight billion mark, the demand for palm oil for edible usage remains firm and growing in markets like India, China, Bangladesh, Turkey and the MPOB is strengthening its research and development activities to increase the usage of palm oil for the production of high value-added products for the export markets.<\/p>\n Market access<\/strong><\/p>\n Ahmad Parveez says the MPOB is also involved with the government to increase market access and further increase the usage of palm oil among consumers in importing countries through bilateral or regional or Free Trade Agreement (FTA) negotiations.<\/p>\n Malaysia\u2019s move to ratify the Regional Comprehensive Economic Partnership will ensure Malaysian palm oil products are guaranteed better market access through the elimination or reduction of import duties and more flexible rules of origin by the 11 trading partner countries involved as compared to countries that do not have an FTA agreement.<\/p>\n That could not come at a more opportune time as the palm oil sector\u2019s poor sustainability record and negative reputation in developed markets poses a threat to future demand.<\/p>\n \u201cAlthough some large plantation companies are making efforts to improve their sustainability record, we note that the reputation of the global palm oil industry has not improved.<\/p>\n \u201cThe EU has adopted more stringent sustainability policies in recent quarters, including the RED-II policy, which will encourage the phase-out of palm oil based biodiesel use over 2021-2030,\u201d Fitch Analytics says in a recent report.<\/p>\n It added large developed market food and drink conglomerates are moving towards procuring sustainable palm oil in the short term and are putting increasing pressure on their traditional providers who are unable to comply with sustainability standards.<\/p>\n Ahmad Parveez is confident the EU will remain one of the biggest markets for Malaysian palm oil and believes the move to restrict use for biofuels is motivated more by political influence and trade protectionism than science.<\/p>\n \u201cMalaysia remains committed to have bilateral cooperation and negotiation in a sincere and constructive manner in ensuring the observation of the principles of fairness, justice, openness, transparency, and non-discrimination in conducting international trade as well as a prevention of the unnecessary impending barrier for market access of palm products into the EU,\u201d he says. (*)<\/p>\n Source: thestar.com.my<\/a><\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<\/a><\/p>\n<\/p>\n<\/a><\/p>\n