Photo shows a palm plantation with fruits ready to be harvested. Plantation companies will be forking out more for their
major cost components, namely labour and fertiliser which account for a combined 60 per cent to 70 per cent of cost of
production per tonne of CPO.

10/01/2012 (Borneo Post) - The Malaysian plantation industry is to face a volatile 2012, bogged down by a slowdown in global demand, coupled with a weaker crude palm oil (CPO) average selling price for the year.

According to Maybank Investment Bank Bhd (Maybank IB) in its research report, “The prolonged debt crisis in the US and Europe has weakened confidence which will affect global demand. This has led to a CPO price forecast of RM2,600 per tonne for 2012, reflecting a slowdown scenario, but not a recession.”

Citing historical trends, the research house noted that the US’ demand for the world’s 17 Oils and Fats shrank by 6.7 per cent in 2009, trailing behind the 2008 recession.

This had led to a slower global consumption of three per cent as the US is the world’s fourth largest consumer of the category. With the eurozone now joining US’ slower growth prospects, Maybank IB believed that the downside risk to consumption demand growth for the next 12 months would be high.

Another factor noted to affect demand further was the removal of US biofuel subsidy. The report highlighted the lack of clarity on whether the US$1 per gallon subsidy which expired on December 31, 2011 would be discontinued altogether or gradually removed.

“Plantation companies are facing declining margins with falling CPO and palm kernel (PK) prices while their cost of production is rising,” the report added.

It believed that the companies would be forking out more for their major cost components, namely labour and fertiliser which accounted for a combined 60 per cent to 70 per cent of cost of production per tonne of CPO.

Fertiliser cost, which accounted for at least one third of total cost of production, displayed a steep year-on-year increase which would raise cost of product per tonne by around RM80 to RM100 per tonne as estimated by Maybank IB.

On the other hand, the wage increase in 2012 (which brought the guaranteed minimum wage to RM850 per month) by the Malayan Agricultural Producers Association members would see an increase of RM40 to RM60 per tonne of production cost.

“In the long run, plantation companies would be able to offset the higher wage through workers efficiency and productivity gains,” Maybank IB opined.

The revision of Indonesia’s CPO export tax structure was also reducing sales proceeds for Malaysian companies with only upstream business in Indonesia, while downstream players based in Malaysia would continue to suffer due to the unfair input cost advantage enjoyed by the Indonesian players.

“To illustrate, based on the CPO price of RM3,000 per tonne, we estimate Indonesia’s downstream players enjoy RM300 per tonne lower input cost,” the research house explained.

Maybank IB noted that the changes in Indonesian export tax structure had successfully led to fresh and aggressive expansion into refineries and oleo-chemicals. It said that the likely consequence from this aggressive expansion was over-capacity in 2013, resulting in depressed margins for all players for an extended period of time.

On the subject of mergers and acquisitions (M&As), the report observed that interest in Malaysian oil palm estates had picked up momentum in 2011, as wealth accumulation over the last few years arising from high CPO average selling price had left companies with stronger balance sheets eager to expand. Hence, the research house expected M&As to pick up this year, with small-to-mid caps in the spot light, seeing that their valuations had lagged the average transacted prices.