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This article first appeared in The Edge Financial Daily on February 12, 2018

KUALA LUMPUR: A weaker crude palm oil (CPO) price — attributed to a stronger ringgit and a two-year high stockpile — could result in plantation companies reporting flat or lower earnings for the first quarter of 2018.

The average CPO price in January was RM2,486 a tonne, which is 23.9% lower than the RM3,268 recorded in the same month last year.

The ringgit has appreciated by 2% against the US dollar so far this year, reaching 3.9395 last Friday. Over the past one year, it has gained 11.4% against the greenback.

As for CPO production, Kenanga Investment Bank Bhd analyst Voon Yee Ping said that purely on a sector basis, the output in the fourth quarter of 2017 was “pretty stable” — at the same level as, or slightly higher than, the third quarter.

“For the first quarter of this year, production should be lower since it is off season, and CPO price was a little lower, so the earnings performance will likely track that accordingly,” she told The Edge Financial Daily via email.

CIMB Investment Bank Bhd equity research head Ivy Ng said palm oil stocks may have risen by 1% month-on-month (m-o-m) to 2.77 million tonnes as at the end of January 2018 due to weak exports.

In December 2017, the stockpile stood at 2.73 million tonnes, compared with 1.66 million in December 2016. The figure was also 7% higher than the 2.55 million tonnes reported for November 2017.

“Stockpiles are high. The current CPO price reflects that amid a stronger ringgit which is averaging 3.9 against the US dollar. As a result, it becomes less competitive to soya oil,” Ng told The Edge Financial Daily.

“Looking at a year-on-year CPO price, it is weaker. The combination of high palm oil stock and lower price due to the ringgit factor, where, overall, earnings for the first quarter of 2018 could be flat to lower for plantation companies,” she added.

However, Ng said the downstream segment could help offset the upstream depending on the profit margin.

In a note to CIMB clients, she said the findings from a survey of 19 plantation areas by the group revealed that Malaysian CPO output was likely to have fallen by 15% m-o-m to 1.56 million tonnes in January.

“Palm oil exports likely declined by about 9.1% m-o-m, based on export statistics released by Societe Generale de Surveillance (SGS) and Intertek Testing Services (ITS).

“According to estimates, cargo surveyor SGS reported a 8.8% drop in exports m-o-m while Intertek recorded a 9.3% fall for the same period,” she added.

The fall in January was attributed to poorer demand from China which tumbled 29% m-o-m, and European Union (down18% m-o-m).

China imported less palm oil partly due to the high stockpile of edible oils in the country and the release of 150,000 tonnes of rapeseed oil reserves by the government.

Ng said Malaysia’s three-month suspension of its 5.5% export tax from Jan 8 to April 7 would neither have an effect on the supply and demand of palm oil nor move the CPO price up in the global market.

Average CPO prices in January rose 3% m-o-m to average RM2,486 per tonne in January following the suspension aimed at reducing the high inventory.

The CPO price’s discount over soybean oil narrowed to US$187 (RM740.52) a tonne in January from US$194 a tonne in December 2017.

“[But] I don’t think buyers are going to rush to buy palm oil because there is no additional cost which would be passed on to their people,” said Ng. “The tax suspension only makes our CPO more attractive than Indonesia’s. Buying countries like China and India would only import when the price is competitive to soya oil.

“It also depends on whether their stockpiles are reducing and they need to stock. At present, China’s inventory is high but demand could rise after Chinese New Year,” she added.

MIDF Amanah Investment Bank Bhd analyst Alan Lim expects to see a higher demand for palm oil from China and India this year, while earnings growth will be single digit.

“India’s consumption of vegetable oils is expected to grow from 18.5 tonnes per capita in 2016. China’s per capita consumption for vegetable oils in 2016 was 27 tonnes.

“China’s consumption of vegetable oils will increase, driven by a positive GDP (gross domestic product,” Lim told The Edge Financial Daily.

He said the earnings growth forecast for plantation companies is based on expectations that the CPO price and fresh fruit bunch (FFB) production will be higher.

Malaysian Palm Oil Board (MPOB) data showed that FFB processed by mills climbed 18% to 101.7 million tonnes in 2017 from 86.3 million tonnes in 2016.

Overall, palm oil production rose 22% last year to 19.91 million tonnes from 17.32 million in 2016, while Indonesia produced 42.01 million tonnes, up 18.09% from 35.58 million tonnes.

JF Apex Securities Bhd analyst Low Zy Jing opines that although FFB production is likely to be up in 2018, a shortage of plantation workers could impact the sector.

“FFB production has recovered at an average of 10% to 20% in 2017 compared with 2016 due to better weather conditions and also because of a lower base the year before. It could grow by 0.5% in 2018.

“However, we are not so positive on the sector this year because of labour issues which affect the overall industry, including the large-cap companies although the impact is less severe than mid-cap firms,” Low told The Edge Financial Daily.

His research house placed a “neutral” call on the sector as it expects a flat FFB production growth and lower CPO price with inventory pilling up. He forecasts CPO price to average at RM2,560 per tonne this year.

“The long-standing challenge of shortage in labour continues to bog down the performance of the plantation sector, putting pressure on planters’ operating costs,” he added.
 

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