SPECULATION A THREAT TO OIL PALM PLANTERS

This write up by LOONG TSE MIN is downloaded from thestar online (Saturday December 6, 2008) and is of interest to all planters.

Speculation in the crude palm oil (CPO) futures market could pose a threat to the plantation industry under current market conditions.

Interband Group palm oil trader Jim Teh told StarBiz that there was a strong speculative element in CPO prices that shot up from RM1,488 per tonne to about RM1,600 last week on thin volume but had tapered off this week

He said importers from China and India had early this year defaulted on their contract orders partly due to speculation as “CPO prices were pushed up and then suddenly dipped”.

Many of the contracts were locked in at RM3,000 per tonne. When CPO fell to RM2,500 per tonne in August, importers in both countries lapsed on their contracts amounting to about 150,000 tonnes.

At the current CPO price of about RM1,500 per tonne, Teh said a further 300,000 to 400,000 tonnes worth of CPO futures contracts were defaulted in October.

“If prices are high but importers default on the contracts, what is the use to the planters?” Teh asked.

Fertiliser prices had shot up in tandem with the CPO price, he said, adding: “Planters, especially smallholders, will be hit in terms of high cost of fertilisers and left with excess stock.”

Teh estimates CPO to trade between RM1,300 and RM1,450 per tonne for the first half of 2009.

At an average price of RM1,400 per tonne, most plantation companies would still have a profit margin of about 25%, which was good, given the current market conditions, he said.

A chief executive officer with a major plantation group holds a differing view.
“I don’t think there is much speculation as most of the foreign funds have left the (CPO) market.

We can see that CPO prices have not dropped to RM1,200 as predicted even as crude oil falls below US$50 a barrel, which is a sign that CPO price is quite stable,” he said.

He also did not see how higher prices were bad for the industry as it gave better profit for plantation companies.

However, United Malacca Bhd CEO Dr Leong Tat Thim concurred with Interband’s Teh.
“Aggressive fluctuation in CPO prices is not good for the industry as it is bad for both buyers and sellers,” Leong told StarBiz.

“Prices between RM1,600 and RM1,800 per tonne will be good and viable to the industry.”

Leong said he expected the CPO price to hold at its current level and bounce back to RM2,000, by the end of next year.

This was due to measures taken by the Government to reduce the current high CPO stock through replanting subsidy and mandatory use of biofuel in all commercial vehicles, he said.

“There is another favourable factor which is the wide price disparity of US$300 per tonne between CPO and soya bean oil prices.

“This makes palm oil a very attractive alternative,” he added.

Leong said planters were trying to keep costs below RM1,000 per tonne of CPO.

“During these difficult times, I hope the Government at federal and state levels will not consider imposing additional taxes on the palm oil industry.”

Higher Cost Of Production: A Great Concern To All Planters

PETALING JAYA: The sharp drop in crude palm oil (CPO) prices, rising cost of raw materials and burdensome taxes have resulted in the cost of production (COP) escalating among local plantation players, hurting smaller and newer plantation companies, especially those from Sarawak.

Planters claim that the current COP had surged, on average, RM1,200 to RM1,700 per tonne now. The COP of more efficient planters jumped at least 50% to RM1,200 per tonne currently from RM600 to RM650 in the past five years. The COP at the less efficient planters, as well as new planters, which meant younger palm trees with lower yields, shot up 87.5% to above RM1,500 per tonne from RM800 earlier.

“Just imagine with a COP above RM1,500 at the current CPO price of RM1,600 to RM1,700 per tonne, many medium to small-time planters will be facing difficulties in making (decent) margins,” said Malaysian Estate Owners’ Association president Boon Weng Siew.

Analysts have estimated that the COP among Sarawak oil palm players would be the highest nationwide at RM1,700 to RM2,000 per tonne.

“At current CPO price of RM1,700, how are Sarawak players going to break even or service their high borrowings at the banks and pay the windfall tax?” Boon asked.

He said the COP situation has changed dramatically, especially the price of fertilisers. The price of fertilizers had gone up by almost three folds to RM4,000 per tonne from RM1,300 to RM1,400 per tonne over the past three years.

The COP of efficient planters like IOI Corp Bhd and United Plantations Bhd is estimated to be in the range of RM1,100 to RM1,200 per tonne “at best,” according to Boon. Analysts have projected the two companies’ yield at 25 to 28 tonnes per ha per year, which was higher than the national industry average of 20 tonnes.

Plantation giant Sime Darby Bhd is said to have an average COP of about RM1,100 per tonne.

Plantation analysts projected the COP for medium-sized planters like IJM Plantations Bhd, Tradewinds Plantation Bhd and Asiatic Development Bhd at RM1,300 to RM1,500 per tonne.

Of late, many oil palm planters nationwide are struggling to keep their escalating COP at bay while grappling with the current decline in crude palm oil (CPO) prices.

They also have to contend with taxes deemed unfair such as the windfall tax and the cess imposed by the Malaysian Palm Oil Board (MPOB), as well as the high cost of fertilizers, chemicals and fuels.

The CPO price trend in November and December would be critical to determine the actual margin erosion among local plantation companies, an analyst with a bank-backed brokerage said. But he noted that the average CPO price at RM3,000 per tonne so far this year was still higher than the 2007 average at RM2,600 per tonne.

“I strongly believe that major oil palm plantation companies can still make good profits for 2008, given the higher CPO average this year and many have locked in their CPO selling price at RM3,000 per tonne in the previous months,” the analyst said.

Boon said many Sarawak-based oil palm plantation players, as new entrants with poor FFB yields, would be hit harder this year, given the bearish CPO price, high COP and the various taxes imposed on them such as the windfall tax.

Last week, seven major Sarawak oil palm companies appealed to the Government to waive the windfall tax or raise the CPO threshold price to RM3,000 per tonne from RM2,000 for calculating the windfall tax.

The Government has imposed a windfall tax on CPO sales at above RM2,000 per tonne, with a 15% tax applicable to plantations in mainland Malaysia, and a 7.5% tax for those in east Malaysia.

Ta Ann Holdings Bhd, a giant timber group with heavy investments in oil palm plantations, is worried. Managing director Datuk Wong Kuo Hea said: “Seasoned Peninsular Malaysia and Sabah planters have enough hectarage of profitable harvesting area to be financially self dependent. Sarawak, as a late entrant, has the lowest area planted with only 20% that can contribute to profit. We are also not financially self-sufficient in our operation and still require huge injection of funds into our new plantations.”

Analysts have projected that many Sarawak planters would continue to make losses from the first to fifth year of harvesting but would start to make profit only in year six if the CPO price was at RM1,700 per tonne.

Top listed Sarawak-based planters include Ta Ann, Sarawak Plantations Bhd, Rimbunan Sawit Bhd, Sarawak Oil Palm Bhd and WTK Holdings Bhd