Boon time for palm oil firms

SANDAKAN, Sabah: PLANTATION companies will see better earnings ahead as the crude palm oil (CPO) price discount in Sabah compared to that in Peninsular Malaysia narrows to RM40 per tonne from RM60.

Effective this year, the discount given to Sabah refiners by planters will narrow to RM40 per tonne from as high as RM100 just seven months ago, a source said yesterday.

"This means plantation companies like Hap Seng Plantations Holdings and IJM Plantations, which are Sabah-centric, should continue to see better earnings," the source added.


When contacted, IJM Plantations chief executive officer and managing director Joseph Tek Choon Yee said: "Yes, we already have contracts done with selected buying refineries here for this month and beyond, with the revised discount."

Tek said planters in Sabah laud the narrowing of the price discount in the midst of buoyant forecast for palm oil prices. 

But this is set against the backdrop of higher cost of production amid lower crop harvest last month. 

Crop production will be further impacted this month if and when "the expected rains really start pouring" in palm oil-producing regions.

Tek noted that the lower discount is not given across the board. "But then, this is leading in the right direction as it reflects improved demand for palm oil. A good start to 2014," he added.

For the past nine weeks, palm oil prices have been trading above RM2,500 a tonne. Yesterday, the third-month benchmark palm oil futures closed RM34 lower at RM2,606 per tonne.


Kenanga Research, in its note to investors, said the plantation sector is poised to shine. 

It has upgraded the oil palm planting sector to "overweight" on the forecast that palm oil prices are expected to trade higher at RM2,800 per tonne, compared with last year's average of RM2,400.

The research house said plantation companies' earnings are now at an inflection point. Palm oil prices have recovered in the last quarter of 2013. Averaging at RM2,506 per tonne, it was two per cent higher than the RM2,465 posted in the last quarter of 2012.

It also expects last month's harvest of oil palm fruit bunches to be seasonally lower than November. As national palm oil stock levels come down, this could provide impetus for prices to rise as high as RM2,900 per tonne by March.

In the last three weeks, the US dollar has started to strengthen against the ringgit as the United States Federal Reserve slowed down its monthly bond purchases to US$75 billion (RM246.75 billion). A weaker ringgit makes palm oil prices cheaper than soya oil. 

In view of this competitive outlook, Kenanga Research is optimistic of better demand for palm oil exports. "We expect this price recovery to fuel earnings growth for the plantation sector. It should last throughout this year and average out at RM2,800 per tonne," it said.