by Adrian Lim
bizhive@theborneopost.com. Posted on July 13, 2014, Sunday
Weather,
as one of the more important aspects for palm oil planters to worry
about for their production during the year, is rapidly changing.A sudden change in weather condition – especially dry and hot weather for a extended period – can negatively affect production and output of palm oil.
As one of the plantation experts Dorab Mistry said, the weather is expected to shape the production and price of the crude palm oil (CPO) this year.
“In the event that El Nino develops, I believe CPO futures will cling to RM3,000 beyond June.
“(Palm oil) production is likely to be affected from late 2014 onwards and we may be staring (at) RM3,500.
“However if rains come as normal and the high cycle kicks in from July onwards, prices can trade in a range between RM2,900 and RM2,600 from July until October.
“Palm oil production is under-performing and stocks are tight,” he said during a palm oil conference in Kuala Lumpur earlier this year.
At the same time, Mistry highlighted some new developments within the oil palm industry which could steer the palm oil market into a new dynamic cycle.
“There is going to be a big expansion of bio diesel capacity in Indonesia in the near future.
“This capacity will require bio diesel producers to lock in palm oil prices at least one year in advance. Almost all of them will be plantation linked.
“Hence, the availability of freely tradable palm oil will become somewhat restricted. It will also require much larger stocks to be maintained.
“Therefore, palm oil stocks will need to be much larger before they begin to exert any pressure on prices.
“For these reasons, I believe the Indonesian mandate is truly a ‘Game Changer’ and will keep palm oil prices relatively high for a long time,” Mistry observed.
On the contrary, he believed there is a small likelihood of production surpassing expectation if rainfall is better than normal.
“If prices of Brent (crude oil) fall and production of world oilseeds is also as expected, palm oil prices can fall below RM2,400 but that possibility is no more than 30 per cent,” he pointed out.
While Mistry, a director of India-based Godrej International Ltd, has his own view on the palm oil market, local analysts hinted at a similar scenario, citing change in weather conditions and palm oil inventory level being the prime aspects affecting the outlook of the plantation industry.
M&A Securities Sdn Bhd (M&A Securities) in a report dated June 26 entitled ‘Betting on El-Nino for palm oil price up-cycle’ said weather plays an important role in the supply equation of production and yield, and particularly one of the key catalysts of CPO price movement.
The hot and dry weather of late is expected to persist for another few months as predicted by the Malaysian Meteorlogical Department. The situation has cause caustic reaction as people wonder whether El-Nino spell had started or otherwise.
Citing the Department of Meteorlogical Malaysia, M&A Securities said the current situations are due to the Southwest Monsoon (dry season for Malaysia) that has started in May and is expected to persist until September.
Surveys by international weather forecasters still indicated that there is a 70 per cent likelihood of the El Nino happening in 2014.
Potential effect of El Nino on palm oil production
Plantation experts have estimated that El-Nino could potentially reduce production up to 30 per cent during normal time depending on severity.
As a result of lower production and lesser yield, the situation could cause the supply of palm oil inventory to be tight.
Already languishing from lower exports and stocks level compared with last year, industry players are anticipating the dry weather to be a potential factor that could exert pressure on CPO price to trade higher.
Ling Ah Hong, a director of Malaysian plantation consultancy and investment company Ganling Sdn Bhd who shared his views during a palm oil conference, said El Nino is normally followed by a surge in palm oil prices due to disruption of supply.
He noted that historically, when El Nino develops, palm oil prices increase.
Outlining two scenarios, he explained a moderate El Nino will reduce global supply growth in 2015 to less than 0.5 million tonnes while a severe EL Nino will result in a contraction of 0.6 million tonnes, subsequently leading to severe supply tightness in the world.
Another factor which Ling strongly believed could cause CPO price to trend higher in the future, is the tightening supply of palm oil inventory.
Giving an outlook for CPO price, he indicated that the price could be moving higher next year.
“We expect palm oil prices to trend higher in 2014 and 2015. (The) average price for 2014 is expected to increase by about 14 per cent to RM2,700 per tonne against RM2,360 per tonne in 2013.
“This
will be supported by steady demand from food and additional demand of
two million tonnes from Indonesia domestic biodiesel usage.“Looming palm oil supply tightness due to past and emerging dry weather will be a key catalyst to upward price movement in 2015.
“Plantation companies in Indonesia and Malaysia should generally fare better this year (compared with 2013),” he observed.
Ling also observed that Sabah and Sarawak planters should witness a recovery in production this year as both geographical locations have expereinced no prolonged rainfall deficit in 2012 and 2013.
Whether rain or dry season is coming, analysts are cautious on the sector’s prospect at present.
Sector outlook and analysts top pick
Despite the possible occurance of the El-Nino, analysts have yet to call the shot of a “buy call” on the plantation sector.
Most of them are forecasting the sector to perform largely in line with expectations with an upward bias.
Malaysian Palm Oil Board (MPOB) which released the palm oil statistics for June on July 10 revealed that the palm oil inventory fell to one-year low.
The research arm of JF Apex Securities Bhd (JF Apex Research) in a report said despite going into high production season, CPO production was lower in June, down 5.26 per cent on monthly basis after growing 6.5 per cent in May.
It observed that the drop of CPO production in June was steeper than market expectations of 0.4 per cent decline as surveyed by a news agency.
JF Apex Research analyst Jessica Low said, “We reckon that the steep fall of palm oil inventory in June to one-year low is a positive surprise to the plantation sector and would support CPO prices.
“The CPO production was under pressure in June as a result of laggard effect of drought in January.
“Looking ahead, we expect CPO production in July to ease further before resuming its uptrend in August, as harvesting days will be fewer in July due to the Hari Raya festival.
“Meanwhile, spot CPO prices are moving around RM2,430 per metric tonne (MT), its nine-month low level.
“We feel that the current CPO price had factored in the adverse effect and expect limited downside for CPO prices,” she said.
For exposure to the plantation sector, most analysts believe that TSH Resources Bhd (TSH) is one of the best performing plantation companies throughout Malaysia.
They believed earnings of TSH is poised to grow healthily over the next few years supported by higher FFB production and better FFB yield on matured palm oil plantation.
The research arm of Public Investment Bank Bhd (Public Invest Research) in a report dated March 20 said TSH’s young Indonesian estates amidst the bullish CPO price movements will see the company become of the biggest plantation gainers this year.
The research firm even highlighted that the plantation company’s young age profile of its oil palm plantation is the growth driver.
Public Invest Research said close to 78 per cent of TSH’s total planted are are below seven years old, with an average age of about six to seven years old.
“We believe the company will be able to maintain its double-digit fresh fruit bunches (FFB) production growth in the next couple of years, albeit at a slower pace driven by its young (tree) age profile.
“In addition, there is unplanted landbank of 23,815 hectares and 53,430 hectares in Malaysia and Indonesia respectively, pointing that there will be continuous expansion in the company for the next 10 to 15 years.
“In the next five to 10 years, we believe the company will rank on par with big capitalisation plantation companies once it has achieved sizeable mature area,” the research firm said.
In the meantime, Public Invest Research is expecting the company to register strong earnings growth this year.
The research firm had forecasted a strong jump for TSH group’s earnings this year supported by increases in palm oil production and CPO prices which will highly benefit the company in being a pure upstream plantation player.
Nonetheless, its forecasts are based on the assumption of 16 per cent rise in FFB production and full-year average CPO price of RM2,750 per metric ton, which is significantly stronger than the average CPO price of RM2,251 per MT recorded last year.
Following a visit to TSH’s plantation estate in Palangka Raya, Central Kalimantan earlier, PublicInvest Research said the company’s plantation estate, PT Sarana Prima Multi Niaga Estate in Central Kalimantan boasted a total gross area of 7,198 hectares.
The research firm said the plantation estate, equipped with a 45 metric tonne per hour mill is producing FFB for TSH and is also one of the best performing mills for the company with an average oil extraction rate (OER) of 24.6 per cent for the last three years.
Hence, given higher FFB production for TSH and its young age profile of the company’s oil palm plantation, Public Invest Research is optimistic that the plantation company earnings will be sustained in the near future.
At the same time, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) and RHB Reseach Institute Sdn Bhd are both upbeat about the company’s financial performance for financial year 2014 (FY14).
Obviously, analysts are sounding the drum after TSH’s financial results for the first quarter of 2014 (1Q14) has largely beaten their expectations.
For 1Q14, TSH’s net profit jumped 162 per cent year-on-year (y-o-y) to RM52.17 million compared with RM19.93 million recorded in 1Q13.
RHB Research said the better than expected financial results was attributed to higher average CPO price realised and double-digit production growth.
Going forward, the research firm expects TSH’s new matured oil palm plantation in Kalimantan and improving FFB yield to lift its earnings for upcoming quarters.
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) also believed that the company’s long term growth remains strong supported by sizeable unplanted plantation landbank and new planting programme.
MIDF Research in a report dated May 23 said, “Given substantial portion of immature and young trees, we are optimistic on TSH long-term earnings prospect.
“TSH high proportion of immature and young trees will be the catalyst to support TSH’s earnings in the long-term.
“Furthermore, as at December 2013, about 66 per cent of its total plantation landbank is still unplanted.
“With new planting programme of approximately 3,000 hectares per year, we believe the growth story of TSH will remain intact,” the research firm noted.
As for Sarawak planters, most of them do not foresee the potential occurance of the El Nino to have an adverse impact on their production.
SARAWAKIAN PLANTERS OUTLOOK
Ta Ann
Ta Ann Holdings Bhd (Ta Ann) being one of the large capitalisation company listed on Bursa Malaysia does not foresee any adverse impact related to El Nino phenomenon as it implements good water management system to conserve water in its peat plantations.
Ta Ann group managing director was quoted as saying,”The potential occurance of the El Nino dry weather phenomenon will not have much impact on the oil palm sector in Sarawak.
“This is because more than 40 per cent of the state’s oil palm plantations are in peat soil areas.
“The water management in peat soil areas will continue to provide water for the palms.
“El Nino will have greater impact on those planted in mineral soil,” he said.
As for Ta Ann, the timber cum plantation company expects its FFB production for 2014 to be around 12 per cent to 14 per cent higher compared to last year as more plantation matures.
Looking ahead, the company expects to carry out new planting of around 2,000 hectares this year which mainly are expansion of its existing plantation estates.
When asked on the company’s plans to acquire more landbank in the near future, Ta Ann revealed plans to develop more native customary rights (NCR) lands jointly with native landowners which will bring many socio-economic benefits.
The company is still in discussions with relevant parties for more land acquisitions to further expand the company’s plantation division.
Additionally, Ta Ann is optimistic on the price of CPO in 2014, expecting comparatively stronger financial performance this year on the back of the anticipated higher FFB production and brighter price outlook for palm oil and timber.
Its young age tree profile with an average of seven years will contribute sustainable growth to the company’s earnings in the future.
The group’s oil palm estates are located in several districts throughout Sarawak, for instance in Sibu, Daro, Igan, Bintulu and Song.
Sarawak Oil Palms
Moving on to another plantation player, Sarawak Oil Palms Bhd (SOP) also expects the company’s FFB production to post double digit growth despite the probability of El Nino.
SOP said,”The FFB production for 2014 is expected to be 1.1 million MT, representing growth of 17.7 per cent against 2013 FFB production.
“The key factor for growth is the shift of palm age profile to more productive age profile despite current dry weather,” the company said.
SOP disclosed that as at Dec 2013, 50.9 per cent of the company’s palm age profile is young from four to 10 years old, 26.8 per cent has achieved prime age between 11 to 20 years, 12.7 per cent is immature and just about 9.6 per cent is 21 years and above.
Moving forward, the company said there will be some replanting of less than 500 hectares carried out at its plantation estates located along Lambir and Suai areas in Miri.
Majority of its plantation estates are located within Miri and Bintulu divisions and its estates located at Niah area has posted the higher yield per hectare for 2013.
As part of the group’s expansion plan, SOP recently announced an acquisition of two plantation companies with 9,600 planted hectares located at Sebauh, Bintulu.
The acquisition is currently pending the fulfillments of certain conditions.
As for CPO prices, the company expects it to move in the range of RM2,400 to RM2,500 per MT this year.
On SOP’s 2014 financial performance, the planter believed it should perform better than last year with improved FFB production and higher average CPO price realised this year as compared to 2013.
Rinbunan Sawit
Likewise, another plantation company Rimbunan Sawit Bhd (Rimbunan Sawit) concurred with Ta Ann and SOP that if the El Nino does happen, its production will not be substantially affected.
In an e-mail interview, Rimbunan Sawit managing director Tiong Chiong Ong expects its our overall figure to go up slightly despite an estimated drop of 10 to 20 per cent by (the potential occurance of) El Nino effect because of increasing matured area and more palms reaching prime production age.
“Currently, the age profile of our oil palm plantation is mostly in the range of seven to 15 years.
“Out of a total of 54,670 hectares, 16,290 hectares or 30 per cent is in the range of seven to 15 years, 13,270 hectares or 24 per cent is more than 15 years, 12,600 hectares or 23 per cent is below 3 years old, 7,310 hectares or 13 per cent is between four to seven years old and 5,200 hectares or 10 per cent is in the range of three to four years old,” he said.
Whilst Rimbunan Sawit does not plan to acquire more plantation landbank in the near future, the plantation company is focusing on planting some 2,500 hectares of plantation landbank this year mostly at its estates in Kuching and Miri region.
The company revealed that its plantation landbank is located at Sibu, Kuching and Miri noting that its wholly-owned subsidiary Nescaya Palma Sdn Bhd which plantation estate is located close to Sibu has the highest yield at 18 MT per hectare in 2013.
On the CPO price outlook, the company opined that it will move in the range of RM2,300 to RM2,500 per MT this year.
As for Rimbunan Sawit’s financial performance for FY14, the company is expecting a marginal increase in overall results with average CPO price realised at about RM2,400 per MT.
ANALYSTS VIEW ON SARAWAK PLANTERS
The research arm of Affin Investment Bank Bhd (Affin Research) in its latest report dated July 8 said Ta Ann’s palm oil division remains a key earnings contributor to the group, at 70 per cent of the group’s total profit before tax for financial year estimate of 2014 to 2016.
The research firm observed that the higher earnings should be supported by increasing maturity of its plantation estates and rising FFB and CPO production as well as yield.
Affin Research said, “We forecast Ta Ann’s matured plantation area of 27,958 hectares as at December 2013 to increase to 30,911 hectares in FY14 and 35,345 hectares in FY15.
“Based on this, we expect FFB and CPO production to continue increasing given Ta Ann’s young weighted average age profile of trees, approximately six to seven years, along with anticipation of higher FFB yield from 18.9 per cent in 2013 to 20 per cent in FY14.
“As at end of May, Ta Ann’s FFB and CPO production increased by 14.9 per cent y-o-y and 55.5 per cent y-o-y to 197,307 MT and 43,592 MT respectively.
RHB Research in a report on May 12 said SOP’s plantation yield is expected to start climbing in 2015 or latest by 2016 after declining in the past five years due to new plantation reaching maturity.
The research firm observed the slowdown for SOP’s newly mature plantation area this year onwards will result in its FFB yield eventually rising.
As for SOP’s acquisition of two companies earlier, RHB Research estimated that the deal is expected to be completed in September and is projected to contribute about 100,000 tonnes of FFB per year from next year onwards.
The research firm noted that SOP had earlier proposed to acquire 60 per cent stake in two companies namely DD Pelita Sebungan Plantation Sdn Bhd and Mutiara Pelita Genaan Plantation Sdn Bhd for RM134.9 million to be funded through a combination of cash and shares.
RHB Research cited the two companies have collectively planted area of 9,660 hectares and the acquisition has translated into a bargain of RM23,275 per hectare, considering the soil is mineral soil.
The research firm further observed that the acquired asset also has some 5,000 hectares of new planting to be done.
Over the long term, RHB Research said SOP is targeting to reach 100,000 hectares of planted area.
The research arm of Maybank Investment Bank Bhd (Maybank Research) said SOP’s FFB production are highly yielded towards the second half of the year.
Maybank Research observed that over the past four years, approximately 58 per cent of SOP yearly FFB output was recorded in the second half of the year.
It noted that typically, the first quarter is the plantation company’s lowest quarter in terms of FFB output and the production is forecasted to peak in the third quarter of a year.
Over the medium term, Maybank Research believed that the prospect of SOP remains bright supported by the company’s three-year compound annual growth rate (CAGR) of FFB output estimated at 12 per cent for 2013 to 2016 and the unlocking of the plantation company’s oil palm estates value near Miri through property development over the next three to five years.
Read more: http://www.theborneopost.com/2014/07/13/el-nino-a-wild-card-for-planters/#ixzz37Pnazi9h
