05/08/2009 (Reuters), Kuala Lumpur - Malaysia's top palm oil state of Sabah will see output in July falling up to 15 percent because of biological tree stress, potentially cutting into stocks and forcing big buyer China to source more palm oil from Indonesia.

Located on the eastern side of Borneo island, Sabah accounts for nearly a third of Malaysia's total palm oil output and any shortfall will drag palm stocks in the world's No. 2 supplier of the vegetable oil below the 1.41 million tonnes notched in June.

Plantation owners and traders said on Wednesday that July crude palm oil output in Sabah could fall to 352,712 tonnes from 414,955 tonnes in June.

"Biological tree stress is a factor but it's also the heavy rains six to eight months ago that have made pollination difficult and contributed to lower yields," said a chief executive of a plantation company.

Mature oil palms are more likely to face prolonged biological stress that settled in after bumper harvests last year and younger trees are more hampered by heavy rains at the end of 2008 that disrupt early pollination.

"We are not bouncing back in the same way the plantations on mainland Malaysia have been going," said another estate owner. "It's a 10-15 percent drop in July but hopefully in August we should see better yields."

Sabah produced slightly more than 410,000 tonnes in June out of Malaysia's total of 1.44 million tonnes and most of it is shipped out to China, the second-largest vegetable oil consumer in the world after India.

"It's a shortfall that Chinese traders will take notice of and they may as well ship from mainland Malaysia or from other parts of Borneo island under Indonesia which are not that badly affected," said a dealer who deals regularly with Chinese importers.

Benchmark palm oil prices eKPOc3 on the Bursa Malaysia Derivatives Exchange jumped 2.3 percent to 2,357 ringgit a tonne on the news, traders said, and then fell back slightly to 2,338 ringgit by 0356 GMT. [POI/]

Local brokerage Hwang-DBS Vickers cut its earnings estimates for Sabah-based IJM Plantations (IJMP.KL) by 21 percent to 91.8 million ringgit for its 2010 financial year due to the decline in fresh fruit bunch yields with tree strees and weather problems.

"We understand that the fresh fruit bunches yield has yet to recover in Sabah on an extended biological tree stress," it said in a research note issued on Wednesday.

"As implied by the year-to-date drop of state production, IJM Plantations also reduced outside fresh fruit bunches purchases by 13 percent on year, which led to a 9 percent decline in its crude palm oil production last quarter."