ESG and labour shortage steals the shine from Malaysia’s plantation stocks

MALAYSIAN palm oil industry players need to quickly resolve two key obstacles that are hindering plantation stocks from shining in tandem with the lucrative crude palm oil (CPO) price which has breached the RM4,000 mark (March 23: RM4,240.50).

The gross disconnect between the very much muted KL Plantation Index and CPO price can be traced to lingering (i) environmental, social and governance (ESG) issues and (ii) labour shortage, according to MIDF Research.

“Apart from lower export demand and lower production, the local plantation sector has been facing some challenges from western countries with regard to few acts and legislation, namely farm-to-fork strategy, EU Renewable Energy Sources Directive (RED) and EU Policy on Forests & Deforestation,” justified the research house in a plantation sector review.

In February, US food company General Mills has issued global ‘no buy orders’ for FGV Holdings Bhd and Sime Darby Plantations Bhd, both of which were banned by the US Customs and Border Protection (CBP) over supposedly human rights violation last year.

On the brighter side, MIDF Research expects Sime Plantation’s outlook to remain resilient given that the group has already commenced legal proceedings against NGO Liberty Shared’s managing director Duncan Jepson to obtain information pertaining to a complaint filed by Jepson against the planter.

As for FGV, the research house noted that the group will revisit the appointment of an independent audit firm for an audit of operations within a reasonable period of time and will continue to engage with the CBP accordingly once an independent auditor has been appointed.

On the issue of labour shortage, MIDF Research said continued shortage of foreign labour force due to the COVID-19 border closure has affected the plantation sector in terms of lower volume of production.

“Presently our palm oil industry is still short of around 50,000 (workers),” projected the research house. “The palm oil industry in Malaysia relies heavily on migrant labour which makes up 70% of the plantation workforce.”

Aside from the ESG and labour issues, the research house expects tight soybean supply (especially from Argentina) to lead to stronger soybean price which in turn will drive CPO selling price.

“On top of that, the subdued inventory level of palm oil in Malaysia would also act as catalyst to CPO price,” opined MIDF Research. “We expect the inventory level to stay below the two million (metric tonne) level in view of the slower production period.”

Moreover, the tight palm oil supply situation will likely remain until 2Q 2021 given the anticipation of weaker output during the post-peak production period.

All-in, MIDF Research has revised upward its 2021 CPO price forecast by 11% to RM3,000/metric tonne (from RM2,700/mt previously). In line with this, it also upgraded the outlook of the plantation sector to “positive” from “neutral”. – March 24, 2021

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