KUALA LUMPUR: Crude palm oil (CPO) prices, which currently hover at RM2,292 per tonne, are likely to get a lift in the near term as the current flood crisis negatively impacts the harvesting and processing of palm oil, said analysts.

They said, however, the lower fourth-quarter earnings outlook should keep upside limited for planters’ share price in the short term.

In a note dated Dec 28, CIMB Investment Bank Bhd plantation analyst Ivy Ng Lee Fang sees the floods in the East Coast reducing palm oil output, identifying Felda Global Ventures Holdings Bhd (FGV), IOI Corp Bhd, Sime Darby Bhd and Kuala Lumpur Kepong Bhd (KLK) as planters with the highest estate exposure to the states impacted by the floods.

“We expect this event to lift CPO prices in the near term on concerns about palm oil supply. But the upside to CPO prices may be capped by worries over slower global growth, weak crude oil prices and higher soybean supplies,” she said, projecting CPO prices to average at RM2,460 per tonne next year.

However, Ng noted that the rise in CPO price may not be sufficient to cover the loss in production from some of the estates impacted by the floods.

“As such, this news is negative for planters that are impacted by the floods. Among the planters under our coverage, FGV currently has the highest proportion (67%) of estates located in the nine states that are reportedly hit by the floods. Sime Darby, IOI Corp and KLK have around 26% to 29% of their total oil palm estates located in these states, followed by Genting Plantations Bhd with 14%,” she said, maintaining a “neutral” rating on the plantation sector.

Ng said it is early days to assess the exact impact of the flooding on CPO output as this will be dependent on the severity and length of the ongoing monsoon.

It was reported that the Malaysian Palm Oil Association had forecast CPO production to fall 21% in the Dec 1 to 20 period compared with a month ago.

On Sept 2, CPO price hit its lowest in five years to RM1,914 per tonne, resulting in the  government stepping in to temporarily waive the export levy until December, which has since been extended to end-February next year.

Since the temporary suspension, prices have rebounded.

Bloomberg reported that prices entered a bullish market on Nov 3, after they rose more than 20% from RM1,929 per tonne on Aug 29.

Low crude oil prices are unlikely to dent CPO prices, said Malaysian Palm Oil Council (MPOC) chairman Datuk Lee Yeow Chor as demand for food outweighs the effects of low crude oil prices. Brent oil fell to a 5½-year low under US$57 (RM199.50) per barrel yesterday as persistent worries about a global supply glut offset concerns about output disruptions in Libya.

“A lot of people put an emphasis on crude oil prices when analysing CPO prices. But the fact is only about 3% of global production of CPO is used for biodiesel,” he told The Edge Financial Daily.

“So the sharply lower price of crude oil will not be a major determining factor for palm oil price,” he said.

Lee, who is IOI Corp chief executive officer, foresees CPO prices rallying at RM2,500 per tonne next year due to favourable supply fundamentals for CPO prices.

“We think after January and February onwards supply fundamentals will be favourable to CPO prices. Demand has been very resilient for food,” he said.

“A lot depends on the supply [of CPO]. We expect the palm oil stock to decrease in the coming months and more sharply in January and February,” he said, adding that factors affecting palm oil output include the current heavy rainfall in the East Coast.

Lee does not expect the implementation of the goods and services tax (GST) at 6% in April next year to affect the Malaysian palm oil industry as close to 90% of the supply is exported, which entails a zero rate.

“There will be additional administrative costs, maybe, but otherwise, the GST has minimal impact on the industry,” he said.

On government policies that may affect the industry, uncertainties over the proposed capping of foreign ownership to 30% in Indonesian plantation companies may deter oil palm plantation companies from expanding in Indonesia, JF Apex Securities Bhd research analyst Jessica Low Jze Tieng said.

She said the proposed policy is unlikely to be revived if newly-elected Indonesian President Joko Widodo, popularly known as Jokowi, intends to encourage foreign direct investment in the country.

“The proposed policy has led to the outcry from plantation companies and we see that the uncertainties may lead to the expansion in Indonesia of plantation companies being put on hold,” she told The Edge Financial Daily via email.

“In our view, we think that the proposed policy is unlikely to be resuscitated if the newly- elected Jokowi is to encourage foreign direct investment in the country.”

A bill calling for foreign ownership to be limited to 30% in plantations had been mooted in the Indonesian Parliament.

Upon opposition from foreign plantation business owners, the bill was passed on Sept 29 this year without the proposed limitation of foreign ownership.

The new policy, however, requires Indonesian plantation firms to allocate 20% of their concessions to local residents.

It also stipulates that the firms help local smallholders who own plantations and companies be given five years to comply with the new ruling.

Low said the research firm is expecting CPO prices to hit RM2,400 per tonne by year-end and to climb up further to RM2,500 per tonne in the first quarter of 2015.

This is expected to be due to the low production season coupled with an increased demand for palm oil during the Chinese New Year, she said. Low said the research house anticipates a lower-than-expected CPO production in the coming months as the lagged impact of a dry spell in the first quarter of 2014 would hit production.

“CPO production in the first half of 2015 (1H15) may come under pressure on lagged impact of the drought in 2014,” she said.

She also said that the shortage of labour remains a challenge in the plantations sector as the booming economy in Indonesia and the competitive plantations industry there had resulted in fewer foreign workers being able to work in Malaysia.

The effect is intensified as there has been no concrete solution in addressing the labour issue, she added. JF Apex’s top pick in the industry is Genting Plantations.

This article first appeared in The Edge Financial Daily, on December 31, 2014.