-  Newsflow in the plantation sector last week were in respect of the fires in Sumatra and Indonesia’s increase in CPO export tax rate from 9% in June to 10.5% in July. Independent cargo surveyors also reported that exports of Malaysian palm oil rose 6.3% to 9.6% in the first 25 days of June compared with the same period in May.

-  According to the latest news reports, Indonesian investigators are building criminal cases against the eight plantation companies suspected of being responsible for the raging fires in Sumatra. RSPO (Roundtable for Sustainable Palm Oil) has also requested that the companies submit digital maps of their plantation estates.

-  In press statements, which were released last week, the companies reiterated that they do not practise open fire burning to clear land. Sime Darby had also provided satellite data of hotspots. Sime Darby said that although five hot spots were found within its concession areas, the areas were planted with cash crops such as corn and sugar cane by the local communities.

-  TH Plantations has confirmed that Indonesian officials visiting Lembaga Tabung Haji’s oil palm estates in Riau did not find any evidence of open fire burning within the estates’ boundaries. The hotspots were located on land owned by local communities, which are adjacent to the estates. If found guilty, penalties include a jail term of 10 years and a Rph10bil (US$1mil) fine. According to reports, guilty companies might also have their profits seized, operations shut down or sued for damages.

-  Based on the CPO export tax rate of 10.5% and assuming that the tax rate for RBD palm olein is raised from 3% to 4%, the cost of CPO for Indonesian refiners would be lower by US$50.52/tonne or RM161/tonne compared to international prices.

-  In Sabah, the cost of CPO for palm refiners is lower by about RM100/tonne due to the discount imposed on CPO price. Hence against their counterparts in Sabah, Indonesian refiners only have a cost advantage of RM61/tonne or US$19/tonne currently. Going forward as refining capacity increases in Indonesia, the cost advantage enjoyed by the Indonesian refiners vis-à-vis their peers in Malaysia would continue to erode.

-  It appears that after the 3% MoM decline in CPO exports in May, exports of Malaysian palm oil might increase in June. According to SGS, the demand for Malaysian palm oil in the first 25 days in June was driven by Pakistan, Bangladesh and ASEAN countries. Pakistan bought 151.1% more palm oil from 1 to 25 June compared to the same period in May.

-  We remain positive on the plantation sector as slowing production and improved demand are expected to support CPO prices. Presently, we have BUYs on Genting Plantations, IJM Plantations, TSH Resources and KL Kepong.  

Source: AmeSecurities