Tough times for palm oil players with stockpiles on the uptrend

  • Business Premium
  • Saturday, 06 Oct 2018

IT has undoubtedly been a challenging year for the Malaysian palm oil industry.

Last month, crude palm oil (CPO) prices fell to RM2,143 per tonne – its lowest level since September 2015 and a 14% fall for the year-to-date.

While the price has recovered slightly over the past week, underpinned by rising crude oil prices and supported by the strength in its rival soybean, the benchmark palm oil contract for December delivery on the Bursa Malaysia Derivatives Exchange closed at RM2,231 per tonne on Thursday, 11% lower than the start of the year.

While these factors have managed to push prices up slightly, the gains have been capped by one major factor – high stockpiles.

Malaysian palm oil inventories have been on an uptrend, climbing to a seven-month high of 2.49 million tonnes in August, with analysts expecting the numbers to continue to soar on the back of increased output.

Findings from a survey by CGS-CIMB Research on 21 plantation areas revealed that Malaysian CPO output may have risen 15% month-on-month to 1.858 million tonnes in September 2018.

The situation is no different in Indonesia – the world’s largest palm oil producer – as stockpiles continue to rise.

To make things worse, escalating trade tension between the United States and China, and weak demand from India due to its higher import taxes, are contributing to a lacklustre near-term CPO price outlook.

The lack of a clear catalyst for CPO prices and the possibility of the low price environment continuing to persist has led to a rating house indicating that Malaysian plantation companies could soon face difficulty repaying their borrowings.

Moody’s Investors Service says the low CPO prices will present a credit challenge for rated palm oil producers – if they remain at current levels. It says continued weak CPO prices will challenge the credit metrics of the four palm oil companies it rates over the next 12 to 18 months.

However, the rating house notes that in the medium to long term, the growing demand for palm oil will support their credit profiles.

“We also expect that the governments of Indonesia and Malaysia – which together produce around 85% of CPO globally – will maintain supportive policies towards their respective palm oil industries and this will continue to provide a valuable underpinning for ratings in the sector,” says Maisam Hasnain, a Moody’s analyst.

The report also points to three key risks that can impact revenue and earnings of palm oil producers over the next 12 to 18 months. The risks are the growing levels of palm oil inventories in Malaysia and Indonesia, which could further weaken the selling prices of CPO, additional tariffs and restrictions placed by the largest CPO-importing countries such as India and weaker soybean oil prices – as the prices of the two vegetable oils usually move in tandem.

During the recent results season, many listed plantation players have posted drastically lower profits, or quarterly losses.

Among the bigger players, IOI Corp Bhd’s net profit plunged by 89% in the fourth quarter dragged by its plantation segment due to lower fruit production and CPO price.

Kuala Lumpur Kepong Bhd’s net profit increase of 25.9% to RM141.93mil for the third quarter ended June 30, was due to higher contributions from its oleochemicals division, which offset the substantial decline in its plantation earnings.

Its plantation earnings fell 43.6% to RM127.8mil due to the drop in the selling prices of CPO and palm kernel, as well as negative contribution from processing and trading operations.

United Plantations Bhd saw its net profit slide 22.4% to RM87.2mil on the back of 13.5% lower revenue for the period ended June 30, 2018.

Declining palm product prices and lower production resulted in a RM22.24mil net loss for Boustead Plantations Bhd in its second quarter ended June 30, compared with a net profit of RM10.78mil in the previous corresponding quarter. Revenue dropped 16% to RM141.75mil from RM169.49mil in the same quarter in 2017.

United Malacca Bhd was not spared as its first quarter results for period ended July 31, slipped into a net loss of RM18.5mil.

Taking a closer look at their financials, the cashflow from operating activities of some of these companies have taken a hit over the past few months.

Sarawak Plantations Bhd saw its cash generated from operations for the six months ended June 30, 2018 fall to RM19.8mil from RM41.8mil a year earlier.

For the same period, United Plantations also saw cash flow from its operating activities fall to RM174mil from RM324.1mil.

With CPO prices at these low levels, it is to be expected that plantation companies, especially the smaller players, will shift gears and look at ways to boost or at the very least, sustain their income.

Larger companies like Sime Darby Plantation Bhd are continuously conducting replanting activities as well as focusing on mechanisation and water management, which help boost FFB production and ultimately improve output.

As for smaller companies, they are likely become more prudent and cut down on their investing activities or look at asset sales.

A recent example is the sale of Pinehill Group’s 8,999-acre brownfield plantation in Perak for RM413.57mil to United Plantations.

More of such deals may be seen in the near future if the current low-price environment continues to persist.

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