CRUDE palm oil (CPO) prices are likely to remain elevated in the first half of 2022 before potentially falling in the second half.

       This will be due to supply issues caused by labour shortages in Malaysia and erratic weather, says Mohd Haris Mohd Arshad, managing director of Sime Darby Oils, which is Sime Darby Plantation Bhd’s downstream arm. Mohd Haris adds that the group does not foresee palm oil production in Malaysia improving significantly in 2022, compared with 2021.

       “This will create yet another supply led rally. I’ll be very hard pressed to argue that prices come down significantly this year. We should be looking at CPO prices ranging between RM5,000 to RM5,500 per tonne in the first half,” he says.

       Mohd Haris was speaking at an online briefing on the group’s fourth quarter ended Dec 31, 2021 (Q4 FY21) financial results.

       Mohd Haris explains that in the second half, palm oil production should recover with the easing of labour shortages on plantations in Malaysia, and at the same time, “you’ll see good soybean crop (production) from Latin America initially and then the United States, and you may see the geopolitical situation improving in Ukraine (the world’s largest producer of sunflower seed and sunflower oil), and then you could get CPO prices back down.”

       However, he does not foresee CPO prices falling to the RM3,000 or RM3,500 per tonne levels.

       “And this sort of puts us in a very difficult position. Because on one hand, while we like these high prices, demand will be reshaped further. It has come to a point where prices are so painful, that demand may just collapse and then, the prices will correct. Because the supply response this year will not be forthcoming. And hence, we are looking at prices to continue to be elevated,” says Mohd Haris.

       He notes that the group is seeing demand rationing particularly in developing markets such as Africa.

       “We are seeing buyers withholding purchases, mainly because prices are very high, beyond what they are used to. While India and China continue to buy, but again, the volume that’s coming through is very slow because of the same reason. In other words, demand rationing is beginning to happen,” says Mohd Haris.

       He also points out that biodiesel mandates is another factor behind elevated CPO prices.

       “With regards to biodiesel mandates, so far, there’s been no change. The only exception that we know of is Thailand, which has reduced its biodiesel blending ratio. And this is one (reason) for the demand in elasticity happening today. Irrespective of prices, you will have to stay blended as per the mandated ratio,” notes Mohd Haris.

       He also points out that there are concerns about soybean supply from Latin America, due to erratic weather.

       “We are very concerned because reports seem to suggest that crops are getting smaller, which definitely could create a shortfall in soybean supply.”

       Regarding labour shortages, Mohd Haris says that the group does not see the issue being addressed, at least within the next four months “because of the processes and so forth.”

       “The assumption is that we will probably see palm oil production to be the same (this year), if not lower versus 2021,” he says, adding that besides weather concerns, another issue is fertiliser prices and supply.

       “Fertiliser prices have skyrocketed to a point where supply is also an issue. You can buy but you don’t get them in time, and if you don’t apply your fertiliser regime as planned, the impact is further down the road. It might not be in 2022 but could be in 2023. So, the question of palm oil supply recovery is a tough one to answer, given all these variables that we’re seeing today,” says Mohd Haris.

       For its Q4 FY21, Sime Darby Plantation more than tripled its net profit year-on-year to RM468mil while revenue jumped 53% to RM5.55bil.

       In a statement, the group said in Q4 FY21, its upstream segment saw a 173% year-on-year jump in profit before interest and tax (PBIT) to RM958mil. The upstream segment’s strong showing was supported by higher realised CPO and palm kernel (PK) prices which increased from an average of RM2,664 to RM4,179 and, from RM1,673 to RM3,363 per tonne respectively.

       Furthermore, oil extraction rates (OER) improved to 21.79% (from 21.35% in Q4 FY20).

       Meanwhile, Sime Darby Oils saw a 42% year-on-year jump in quarterly PBIT to a record RM287mil in Q4 FY21, mainly due to improved sales volumes in its European operations and higher margins from its Asia Pacific bulk operations.

       The group also noted that in Q4 FY21, although fresh fruit bunch (FFB) production was lower, strong prices boosted the group’s performance, resulting in all segments recording higher year-on-year profits.

       For the full financial year (FY21), the group’s net profit jumped 90% year-on-year to RM2.26bil while revenue was 43% higher to RM18.7bil, mainly due to higher realised CPO and PK prices as well as better OER which compensated for lower FFB production.

       FFB production was impacted by the prolonged labour shortage in the Malaysian palm oil industry. In FY21, the group also recorded an impairment charge of RM279mil to its immature rubber plantation in Malaysia, which was significantly affected by pestoliopsis disease and acute labour shortage.

       Regarding its outlook, the group said it expects palm oil prices to remain elevated, at least throughout the first half of 2022 as supplies are only anticipated to increase in the second half of the year in line with the high-crop season.

       With the recent decision by the government to lift the freeze on the intake of foreign workers which has been in place since June 2020, the group is cautiously optimistic that this may provide further support for its FFB production, particularly from its Malaysian operations to increase in the second half of the year, in line with palm oil’s typical peak production period.

       Group managing director Mohamad Helmy Othman Basha stated that the path ahead remains challenging and noted that on Jan 28, 2022, the United States Customs and Border Protection issued a finding that certain Sime Darby Plantation’s palm oil products are produced using convict, forced or indentured labour.

       “Whilst the group embarks on reimbursing recruitment fees and related costs to current and past foreign workers that may have been charged by third-party agents in source countries, we are also looking forward to the completion of the independent assessment of our Malaysian operations. Meanwhile, the group has implemented several measures to improve its existing governance structures, policies and procedures,” he said.

       On Thursday, 2022, the group’s 15,078 current foreign workers were reimbursed RM38.55mil for recruitment fees they may have incurred to secure employment with Sime Darby Plantation.

       The reimbursements were paid in a single lump sum payment to the foreign workers.

       All amounts payable to qualifying current foreign workers have been verified by independent third-party auditors.

       Mohamad Helmy also said the group will be looking to continue to address the current acute labour shortage by reducing its dependence on manual labour.

       “Our focus on the mechanisation, automation and digitalisation of our plantation operations will be another top priority for us in 2022 as we look towards reinventing the nature of work in our plantations and intensifying our efforts to recruit more local workers. We believe 2022 will be a transformative year for the group,” he said.