PETALING JAYA: A higher environmental, social and governance (ESG) compliance and monitoring costs could somewhat undermine the performance of local plantation companies moving forward.
This will make local planters less cost-competitive compared with their regional peers, says CGS-CIMB Research.
However, the impact of higher ESG costs could be reduced if “local planters can significantly boost productivity via higher fresh fruit bunch yields,” said the research house in its latest report.
Other cost pressures for local planters include higher fertiliser given 93% surge year-on-year (y-o-y) in potash price as well as increasing labour costs, following 25% hike in minimum wage to RM1,500 per month starting May 1.
The research house, which maintained a “neutral” call on the sector, noted that the current high crude palm oil average selling price at RM6,392 per tonne, up 57% y-o-y should help to offset the higher costs.
CGS-CIMB Research is also generally positive with the ongoing improvements in labour policy and practices by local planters that were affected by the US Customs and Border Protection (CBP) ban.
“For Sime Darby Plantation Bhd (SDP), we think resolution of the United States CBP’s concerns could be in sight after the planter made significant progress in addressing gaps relating to its labour practices.
“This will help lift some of the negative ESG perceptions on Malaysian planters,” it added.
Having said that, this comes with one-off remediation fees and potential 7% increase in future cost of production that could also impact other Malaysian planters, CGS-CIMB Research noted.
On Feb 15, SDP announced that its board had approved a provision of RM82.2mil to reimburse unreported payments charged by agents and third parties for their current and past foreign workers.
Of the total, it has reimbursed 15,078 workers a total RM38.55mil (average: RM2,556 per worker) on Feb 17 and has set aside a sinking fund of RM43.47mil to reimburse 19,656 former foreign workers (average: RM2,211 per worker).
The research house said “We gather the cost of production could rise by as much as 7% to account for improvements in labour practices that SDP group has rolled out.
“This works out to be about RM119 per tonne increase in cost of production of RM1,700 per palm products for financial year 2021 for its Malaysian estates,” said the research house.
CGS-CIMB Research pointed out that FGV Holdings Bhd, which was issued a withhold release order by the US CBP, could face rising cost pressures to meet the higher standards of labour practices, based on the benchmark set by SDP.
Other big planters such as IOI Corp Bhd and Kuala Lumpur Kepong Bhd would likely continue to look for ways to improve on their labour practices which could, over time, also raise their operating costs, said the research house.