12/08/2011 (The Sun Daily) - Crude palm oil (CPO) prices on Bursa Derivatives held firm Wednesday to halt the recent slide, but the prospect of weaker demand overseas and a bumper crop at home means prices are likely to remain soft for the rest of the year.

And falling prices will crimp profit at planters like Sime Darby Bhd, IOI Corp Bhd and KL Kepong Bhd. The three companies combined make up about 15% of the benchmark FTSE Bursa Malaysia KL Composite Index (FBM KLCI).

Their outlook will have a bearing on the broader market direction.

"We may downgrade our rating on the Malaysian plantation sector following the upcoming results season given Malaysian planters' unattractive valuations relative to regional peers, our expectations of lower selling prices in the second half of the year, higher labour costs and potential downside risk to our CPO price forecast for 2012,'' CIMB Research said in a note Wednesday.

The fundamentals for CPO were already shaky coming into August, with official data pointing to rising stockpile at home. The sudden risk aversion among financial investors from last week accelerated the plunge in commodity prices.

By Monday, CPO prices had fallen below the psychologically important level of RM3,000 per tonne. The benchmark third-month CPO futures contract was at RM2,937 a tonne Wednesday.

The contract had tumbled by a third from its recent high of RM3,906 a tonne hit on Feb 12.

CIMB's Ng warned there is a "downside risk" to her current CPO price forecasts of RM3,200 for 2011 and RM2,900 for 2012. As it is, CIMB Research already has a "neutral" rating on the sector and has Sime Darby as its only buy pick.

She said plans to increase wages for plantation workers by 10% will also crimp earnings by between 2% and 4%, but this is based on the assumption that the salary hike would have no impact on productivity.

Based on figures from Malaysian Agricultural Producers Association (MAPA), the hike will raise the cost of fresh fruit bunch (FFB) production by around RM30 per tonne. The additional cost would be about RM380 million a year.

MAPA represents 140 plantation companies which produce 12.6 million tonnes of FFB a year, valued at RM8 billion.

The wage move follows Sime Darby's announcement in June that it will increase the salaries of its 37,000 workers by RM200, effective July.

Under the scheme, MAPA members' employees will receive RM650 per month in guaranteed earnings with an additional remuneration of RM200 per month from October.

RHB Research believes the hike would have a bigger impact on pure plantation firms like Genting Plantations Bhd, IJM Plantations Bhd and TH Plantations Bhd more than the integrated players like IOI, KLK and Sime Darby.

"We will make the changes to our forecasts during the upcoming results reports for the plantation companies,'' analyst Hoe Lee Leng said.