KL Plantation Index down to 8-year low
Commodity hit by plunging CPO prices, trade war sentiment
PETALING JAYA: The KL Plantation Index fell to its lowest in nearly eight years amid plunging crude palm oil (CPO) prices, as well as sell-offs in major commodities by investors whose sentiments are being spooked by the intensifying US-China trade war.
Despite climbing 11.83 points to 13,184.84 yesterday, the index was at its lowest since October 2010.
Analysts said the multi-year low was in tandem with CPO prices that has been trending downwards.
“We foresee a double whammy for the plantation sector, attributed to weaker CPO prices and higher operating costs, dragged by lower palm kernel prices, higher fertiliser cost and the adoption of new accounting policy,” said Public Investment Bank (PIVB) Research in a recent report.
Given the muted demand in the near term and excess supplies due to bumper harvest in global oil seeds, as well as record palm oil production in Indonesia and Malaysia this year, PIVB has cut its CPO price forecasts from RM2,500 per tonne to RM2,350 per tonne.
“Also, given the stronger CPO production outlook in the second half of 2018, boosted by the seasonal trend and favourable rainfall, CPO price is unlikely to strengthen in the near term.”
The research house also noted that the US-China trade war has been hitting soybean demand.
In response to the recent US tariffs on US$50bil (RM200bil) of Chinese imports, China has also imposed a 25% tariff on US$34bil (RM136bil) worth of US imports, including electric vehicles, meats, oil and gas products as well as soybean effective July 6.
“The import tariffs will increase prices for soybeans in transit to China that arrive after July 6, potentially prompting buyers to cancel purchases.
“Following imposed by each other, soybean futures tumbled 2.3% to US$9.03 (RM36) per bushel, the lowest level in a year as farmers prepared for disruption to the US$12bil (RM48bil) worth soybean shipments they sent to China annually,” said PIVB.
Soybean futures for July delivery dropped more than 7% to a low of $8.415 a bushel, their lowest since March 2009.
On a year-to-date basis, prices of precious metals have also fallen, with copper dropping 5.62% to US$6,840 per tonne and aluminium slipping 4.28% to US$2,171 per tonne.
Separately, PIVB said the new minimum wage policy in August would knock out roughly 1% and 4% of plantation companies’ bottomlines, depending on their exposures to Malaysian plantation land bank.
“Generally, East Malaysian plantation players will be more severely affected considering a bigger jump in their wage growth.”
The research house said TSH Resources would see the least impact as Malaysian plantation land made up only 20% of its total planted area; while Ta Ann Holdings would be the biggest victim as all of its planted area is located in Sarawak; followed by Felda Global Ventures (95%) and IOI Corp (91%).
Under the new government’s manifesto, the new minimum wage level is expected to see a staggering growth of 50% to 63% from the current level of RM1,000 per month and RM920 per month for Peninsular and East Malaysia, respectively.
“Labour cost, which accounts for about 20% of the labour-intensive palm industry’s operating cost, will see higher minimum wages of RM1,500 per month standardised nationwide within five years, while also subjected to review every two years.
“This works out to an annual average wage growth of 10% a year, which is sharply higher than the annual salary growth of 6% in Malaysia. However, the new government will share 50% of the wage hike, which will help cushion the financial pressure on plantation companies,” said PIVB.
Locally-listed planters will now also need to fully comply with the revised Malaysian Financial Reporting Standards (MFRS) 116 and MFRS 141 Agriculture: Bearer Plants accounting standards in their quarterly results from 2018 onwards.
According to Maybank Investment Bank Research (Maybank IB) in a recent report, the revised MFRS will change the way planters recognise their upstream plantations in their books and the impact varies according to the companies’ existing accounting policies.
Effective Jan 1, 2016, locally-listed planters had been required to recognise bearer plants such as oil palm trees in accordance with MFRS 116 Property, Plant and Equipment.
But some companies have the option to defer the application of the new accounting standards until after Jan 1, 2018.
Maybank IB said some large-cap planters have undertaken early adoption of the new MFRS, noting however that the impact “has been a mixed bag.”
It said big players such as Sime Darby Plantations, IOI Corp and Genting Plantations, which adopted the standards in the financial years 2016 and 2017, have all opted for the cost method.
“We believe most of the remaining companies would have chosen the cost method with effect from Jan 1, 2018 as it has lesser impact on the profit and loss in the years following the adoption of the standard,” it said.
East Malaysian plantation players will be more severely affected considering a bigger jump in their wage growth. Public Investment Bank Research