KUALA LUMPUR: The country’s two largest plantation groups — FGV Holdings Bhd and Sime Darby Plantation Bhd (SDP) — are pleading for the Sabah state government’s understanding of the tough situation that the oil palm estate owners are facing in the state as a result of shutting down operations in the state.

The state’s decision resulted in the shutdown of palm oil operations in a total of six Sabah districts, which account for 75% of the state’s crude palm oil (CPO) production. This is likely to result in fresh fruit bunches (FFB) rotting on the trees due to the delay in harvesting at the estates.

The six areas are Tawau, Lahad Datu, Kinabatangan, Kalabakan, Semporna and Kunak.

FFB harvesting happens throughout the year, typically it reaches its peak around the third quarter.

FGV yesterday added its voice to concerns raised by the Malaysian Palm Oil Association (MPOA) and the Malaysian Estate Owner Association (MEOA) over a recent decision by the Sabah state government to close palm oil operations in three additional districts in Sabah.

In a statement yesterday, FGV said it understands the state government’s concerns about the increasing cases of Covid-19 in Sabah, but it is also concerned about the social impact of the closure.

The plantation giant, which owns estate in Sabah, pointed out that the palm oil industry was recognised as an essential service, all operations related to the industry need to be continued to avoid worse financial and social implications.

“FGV also takes into account the welfare of 871 families in Felda Sahabat and 776 families in Feklda Umas, whose incomes will be affected as a result of the closure.

“FGV hopes that the Sabah state government will deliberate MPOA’s views and reconsider the decision,” it said.

Likewise, SDP is also backing the concerns raised by the MPOA and MEOA about the closure of palm oil operations in three additional districts in Sabah.

SDP said it appreciates and understands that Covid-19 is being prioritised by the state government. However, it also believes that the initiative on containment needs to be balanced with considerations to not jeopardise industries recognised by the National Security Council (NSC) as essential to avoid potentially adverse and severe implications arising from the decision.

“We are hopeful that the state government of Sabah will take the MPOA’s concerns into account and reconsider its decision.

“This is in line with the NSC’s move to allow palm oil companies to continue limited parts of their operations deemed essential by strictly adhering to the conditions and operational guidelines as specified by the NSC,” SDP said.

Sabah is the largest state in terms of palm oil production, contributing 25% of 2019’s production.

When contacted by The Edge Financial Daily, MIDF Research Analyst Khoo Zhen Ye said the shutdown will result in lower CPO output during the MCO as fewer FFB are being harvested.

“Meanwhile, the delay in collecting the ripe FFB after the lockdown might lead to lower CPO quality as well.

“This is mainly predicated on the possible lower CPO yield as caused by the lower quality of the late-harvested FFB,” he said.

UOB Kay Hian forecast that the loss of CPO production from these areas could be as high as 240,000 tonnes a month or 18% to 20% of Malaysian monthly production – translating into a 2% loss to Malaysia’s CPO production in 2020.

Hap Seng Plantations Holdings Bhd, Genting Plantations Bhd, Kuala Lumpur Kepong Bhd (KLK), Kim Loong Resources Bhd and IOI Corp Bhd would be the most affected.

That said, Hap Seng would see the highest impact with 26% of earnings at 95% of their estates are in the affected areas.

Plantation companies would still remain profitable if CPO prices average at RM2,400 a tonne with 5% lower FFB production and 15% higher cost of production.

In a note on Tuesday, CGS-CIMB Research opined that the additional two-week closure will result in a drop of 132,000 tonnes or 9% of Malaysia’s monthly CPO output.

“This will likely cut the palm oil inventory figure for end-April and will be positive for CPO prices in the near-term, benefitting planters that are not affected by the shutdown.

“The earnings of upstream palm oil producers with exposure to Sabah estates are likely to be hardest hit by this directive as estate costs are mostly fixed and the loss in revenue will mostly flow through to earnings,” said Ng and Ravi. They added that this will negatively impact cash flows of planters and millers and result in potentially undeliverable commitments if planters have sold their crops forward.