Sime Darby: Malaysia plantation shares suffer from low palm oil prices, supply glut

Sime Darby: Malaysia plantation shares suffer from low palm oil prices, supply glut

KUALA LUMPUR (NewsRise) — Despite a recent run-up in palm oil prices from its six-year low in August, shares of palm planters are languishing at multi-month lows as shrinking demand from India and a mammoth stockpile cloud prospects of any sharp gains.

     However, a strengthening El Nino and haze are likely to crimp yields, which in turn, would help palm oil prices firm up further and support shares in the medium-term, analysts said.

     Shares of Sime Darby, the world’s largest palm oil producer by acreage, have slipped 18% so far this year while state-run Felda Global Ventures has lost nearly a third of its value. That compares to the benchmark FTSE Bursa Malaysia KLCI’s 9.2% year-to-date decline.

     “The sector’s outlook is rather bearish because of the strengthening U.S. dollar and softer economic growth in China and other emerging markets,” said Areca Capital’s Chief Executive Danny Wong, who manages assets worth $156 million. “We think commodity prices will remain low for a while.”

     Malaysian financial markets have witnessed sharp foreign outflows, in part, due to decline in crude oil prices and concerns over debt-laden state investment fund 1 Malaysia Development Bhd. An ongoing political scandal centring on Prime Minister Najib Razak’s alleged financial links to 1MDB have also added to investors’ woes.

     Foreign investors have sold 17.7 billion ringgit ($3.99 billion) worth of shares since January, more than the 6.9 billion ringgit worth of shares they sold through 2014, according to data from MIDF Amanah Investment Bank.

     The outflows have pressured Malaysian equities, especially the palm stocks that have already suffered due to weak crude palm oil prices.

     However, the benchmark Crude Palm Oil Futures Contract on Bursa Malaysia Derivatives in Kuala Lumpur has risen about 28% from this year’s closing low of 1,867 ringgit on Aug. 26, beating the 20% advance that’s an accepted definition of a bull market.

     Palm prices surged 11% last week, the biggest weekly gain since November 2008, following expectations that a worsening El Nino weather condition and a haze arising out of forest fires in Indonesia could crimp production and trim palm fruit yield. Thick smoke arising from the fires hinders photosynthesis and in turn, threatens yields of palm fruits which are due for harvesting.

     This has sparked expectations among some market participants such as Nomura Securities analyst June Ng, who says the prolonged patch of low crude palm oil price isn’t sustainable, and expects the prices to increase gradually to 2,300 ringgit a ton over the next three months.

     Malaysia and Indonesia, which account for combined 85% of global palm oil production, will meet in October to discuss measures to stabilize palm oil prices.

     “We believe stockpiling is costly and probably not feasible for palm oil” but measures such as incentives to smallholders to replant old and less productive palms could help to drive demand higher and cut inventories, said Affin Hwang Investment Bank analyst Ong Keng Wee.

     Last week, Malaysia launched a $23 million incentive scheme to replant 83,000 hectares of unproductive and replace ageing palm trees in the country. Inventories rose 10% in August to 2.5 million tons as production rose and exports slowed, according to latest data from the Malaysian Palm Oil Board.

     Still a slowing demand from India, the world’s biggest palm oil importer, may limit a rally in palm prices amid record output and shrinking demand for vegetable oils for bio diesel feedstock.

     India’s move to raise import tax on cooking oils this month will also keep a lid on inbound shipments. Asia’s third largest economy increased the import duty on crude palm and soybean oils to 12.5% from 7.5%, while the tariff on refined oils was increased to 20% from 15%, the Central Board of Excise and Customs said on September 18.

     “There could be short term blip in demand as we believe the Indian buyers may have stock-piled ahead in anticipation of the tariff hike,” said Maybank Investment Bank analyst Ong Chee Ting.

     Shares of Sime Darby rose 0.5% at 7.53 ringgit 3.30pm local time while Felda Global Ventures fell 2.7% at 1.44 ringgit.

Sime Darby: Malaysia plantation shares suffer from low palm oil prices, supply glut