Ringgit poser for planters

A potential appreciation of the ringgit against the US dollar by the end of this year will likely have a mixed impact on local planters’ future earnings.

Fundamentally, the ringgit is now seen to be on a stronger footing, supported by firming domestic demand, robust external sector and still elevated global commodity prices.

Despite being traded around RM4.45 to the US dollar over the last two weeks, the weakest in five years, the local currency has appreciated against other major currencies such as the euro (4.1%), British pound (4%) and Japanese yen (8.4%) over the past seven months.

For local plantation companies, the strengthening of the ringgit to the greenback will be most beneficial particularly for those with the bulk of their borrowings and fertiliser costs that are denominated in the US dollar.

For example, fertiliser, which accounts for 30% to 35% of most oil palm planters’ total cost of production, soared over 30% at record prices. This makes it rather challenging for planters to manage their rising costs.

Hence, a ringgit appreciation could help lift upstream planters’ earnings before interest, tax, depreciation and amortisation as well as improve on their net gearing levels.

A local brokerage recently cited that the US dollar appreciation against the ringgit by 1% could result in an impact of Rm23mil for Sime Darby Plantation Bhd.

On the flip side, a strong ringgit appreciation, however, will not benefit the top line of many upstream plantation companies. This is because most of these planters’ upstream businesses are adopting the crude palm oil (CPO) selling strategy at an average of 70:30 ratio in the spot and futures contracts.

With only 30% used for forward contracts, a potential ringgit appreciation will not likely provide good returns to upstream players.

The CPO spot price is currently trading at around RM4,350 per tonne while the third benchmark CPO futures contract is trading at about RM4,270 per tonne.

Bearing all these factors, all eyes are now set on the release of the planters’ second-quarter results for 2022, slated by the end of this month.