Planters face wage squeeze
Election pledges on minimum salary, foreign labour may affect their bottomline
THE labour-intensive oil palm sector will likely face margin pressures from Pakatan Harapan’s election manifesto for a higher minimum wage and to reduce dependence on foreign labour, say analysts.
The new government plans to raise the minimum wage in Sabah and Sarawak to be equal to that of Peninsular Malaysia. It also plans to raise the minimum wage level to RM1,500 per month nationwide during its first term in power and to review this rate every two years.
In Malaysia, there are about 428,000 workers in the oil palm industry, of which 77% or 328,400 are foreign workers.
The high pool of foreign labour in the sector has been due the tough working environment despite the attractive pay, analysts say.
According to Public Investment Bank Bhd (PIVB), the new minimum wage level is expected to see a staggering growth of between 50% and 63% from the current level of RM1,000 per month for Peninsular Malaysia and RM920 per month for Sabah and Sarawak.
“Labour cost, which accounts for about 20% of the planters’ operating cost, will see higher minimum wages of RM1,500 per month standardised nationwide within five years, and also subject for a review in 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.
On the other hand, the new government will share 50% of the wage hike, which will help cushion the financial pressure on plantation companies.
“Based on our channel checks, the new minimum wage level will knock out 1% to 4% of plantation companies’ bottomlines depending on their exposure to plantation land bank in Malaysia,” says PIVB in its report.
Generally, Sabah and Sarawak plantation players will be more severely affected considering a bigger jump in their wage growth.
PIVB expects that TSH Resources Bhd will see the least impact as its local plantation land makes up only 20% of its total planted area.
Ta Ann Holdings Bhd, however, will be the biggest victim as all of its planted area is located in Sarawak followed by Felda Global Ventures Holdings Bhd (95%) and IOI Corporation Bhd (91%).
Generally, plantation workers are classified into two types, harvesters and general workers. Harvesters are skilled workers and they normally command better remuneration than general workers.
“Their pay, in general, are in excess of RM1,500 per month and can even exceed more than RM2,000 during peak crop season harvesting.
“The monthly salary for general workers, inclusive of allowances and incentives, is generally in the range of RM1,100 to RM1,300 per month,” it adds.
Despite the potential sharp rise in minimum wages, PIVB think the impact would be moderate for the labour-intensive industry as “the new government will share the additional cost of RM500 with the employer equally.”
Pakatan Harapan will also allocate some incentives for plantation companies to invest into machineries, which can partly reduce the dependency on foreign workers over the long term.
On the positive side, the higher minimum wage policy will help improve the companies’ productivities, while others may consider investing in additional capital expenditure on automation or mechanical processes to reduce the workforce, adds PIVB.
CIMB Research describes the latest development as slightly negative for planters.
It points out that a higher minimum wage will raise local planters’ costs of production unless offset by productivity gains.
The research unit which has a neutral rating on the plantation sector expect the higher costs could be partially offset by better CPO prices in the second half of 2018.
“The upside risks are higher CPO prices and output, while the downside risks will include weaker demand for palm oil, lower CPO prices and slower new plantings,” adds CIMB Research.
UOB Kay Hian, in its report, says “there is trading opportunity if the ringgit weakens in immediate term, as CPO price is negative correlated to ringgit movement.
“Every 10% increase in CPO price from our base case would increase the plantation companies’ earnings by 13% for integrated players and about 24% for pure upstream players.”
For longer term, the plantation sector should also benefit if the new government could review the industry’s duty and cess structure.
It notes that the oil palm plantation sector is heavily taxed. For example, about one third of the pre-tax profit goes to the government in form of various taxes and cess.
Hence, any reduction or removal of these taxes/cess will be positive for the sector, says UOB Kay Hian.
In addition, the plantation sector outlook is relatively less subjective to any near term policy shocks and should hold up better.
On CPO price outlook, PIVB says despite the waiver of CPO export duties over the last four months, price performances have been lacklustre with a 4.4% year-to-date loss to the current level of RM2,390 per tonne.
It is also below its current full-year forecast of RM2,500 per month.
PIVB says the depressed CPO prices are mainly due to few key factors, namely, strong recovery of the ringgit and current high inventory levels.
Furthermore, the high production season is expected to make a comeback soon, exerting further pressure on inventories.
On the positive side, the current high oil price levels will help push more demand for biodiesel as it looks more commercially viable (without subsidies) based on the current spread.
The research unit says “we are making no changes to our earnings forecasts for now pending further guidance on the proposed minimum wage policy.
“Hence, we continue to rate the sector outlook with a neutral call.”