KUALA LUMPUR: Malaysia’s palm oil production could be affected in the immediate term should there be continuous rainfall which is likely to trigger floods in low-lying areas.
Given that the severe weather in the country is forecast to last until March, heavy rain and flooding are likely to slow down the harvesting progress and cause delays in the evacuation of fresh fruit bunch (FFB).
The recent floods had hit Kelantan, Terengganu, Selangor, Pahang, Melaka, Negri Sembilan, Johor, Sabah and Sarawak.
According to TA Securities Research, the affected states supplied up to 87% of Malaysia’s total palm oil output last year, noting that supply disruption from the flooding would have an impact on the production and price of crude palm oil (CPO).
“Any supply disruption resulting from the flood in these states will have a far-reaching impact on Malaysia’s CPO output and the price of CPO is expected to stay elevated in the near-term,” it added.
According to TA Securities Research’s sensitivity analysis, for every 1% decline in FFB production and 1% increase in CPO price, the plantation companies would see higher earnings hovering between 1.3% and 2.3%.
Most of the plantation companies under its coverage have plantation estates in the affected states.
According to the research house, the impact of the recent flood is still minimal at this juncture.
“Sime Darby Plantation Bhd, FGV Holdings Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd have experienced only marginal impact from the recent floods and managements are closely monitoring the situation,” it pointed out.
However, the above-average rainfall from the severe weather would lead to bumper harvesting of palm oil in the second half of this year (H2’22) due to rising pasture and yields.
According to TA Securities Research, CPO production in the second half had outgrown the first half by an average 9% for the last 10 years.
“Our research using the 10-year historical CPO data shows that the CPO production is seasonally weak in the first quarter of every year, declining as much as average 13% and 7% month-on-month in January and February, respectively, before rebounding by 15% in March.
“This is mainly driven by the monsoon season during the year-end and the short working month in February in conjunction with Lunar Chinese New Year,” it said.
As such, the research house said it is keeping its CPO price assumption of RM3,500 for this year which has already factored in the seasonally low supply in the first quarter of this year.
“This is especially the case after reaffirming that the flood damages to the companies under our coverage are manageable,” it said.
Having said that, TA Securities Research projected CPO prices to stay elevated at average RM4,000 per tonne in the first half of this year and gradually tapering off to RM3,000 per tonne in the second half.
As such, it maintained its “neutral” recommendation on the plantation sector, with an unchanged CPO price estimate.
The key downside risks to its recommendation include higher-than-expected rise in soybean production, which would likely compress prices of other edible oils in the market.
Other factors include weaker-than-expected demand from China and India, delay in global economic recovery due to the prolonged pandemic, as well as unfavourable government policies, which will affect the demand for palm oil.