Published July 3, 2009

Worst is over for plantation sector: IOI

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(PUTRAJAYA) IOI Corp, Malaysia's No 2 planter, said on Thursday that the worst was over for the plantation sector as palm oil prices have recovered from last year's slump although M&A activity would be muted.

Picking up: Palm oil prices have recovered more than 60% from a low of RM1,331 per tonne in October on surging Asian demand

Earnings of Malaysian palm oil producers plunged in the first quarter as crude palm oil prices more than halved from a year ago.

IOI, valued at US$8.37 billion, saw net profit nearly wiped out during January-March due to weak crude palm oil prices and large foreign translation losses on its US dollar borrowings.

Sime Darby, Malaysia's top planter, reported a 85 per cent drop in net profit while third-ranked Kuala Lumpur Kepong saw net profit down 52 per cent in the same period. 'It's quite obvious it will be better. The industry including ourselves expects to see much better fourth-quarter (April-June) operating results,' IOI executive director Lee Yeow Chor told Reuters at the company's headquarters in the administrative capital of Putrajaya.

Malaysia is the world's second-largest palm oil producer after Indonesia.

Crude palm oil prices hit a record RM4,486 (S$1,850) a tonne in March 2008 before collapsing at the height of the global financial meltdown and triggering speculation that distressed plantation firms starting out would sell.

But Mr Lee said the opportunities for merger and acquisition in the sector are hard to find now as the palm oil price recovery helped smaller firms hold out for better deals.

'Because the sharp price drop has not really been for a long time, the pressures on them (smaller planters), in terms of cashflow or repayment of bank borrowings is not so great.'

IOI, which owns oil palm estates in Malaysia and Indonesia, saw net profit for the third-quarter to March plunge 94 per cent to RM37.36 million from a year ago on an unrealised forex translation loss of RM232.4 million.

The sharp drop in third-quarter earnings was due mainly to 'a lot of translation adjustments' on its US dollar debt, said Mr Lee, adding that IOI expects the forex losses to reverse in the upcoming quarterly results.

'For fourth quarter with the weakening of the US dollar, from end-March of around RM3.63, we expect to have some gains in currency translation for US dollar borrowings,' said Mr Lee.

'We borrow US dollars, because it corresponds with our palm oil revenue, so that is a natural hedge between our borrowings and receipt of revenue,' he explained.

Palm oil prices have now recovered more than 60 per cent from a low of RM1,331 per tonne in October on surging Asian demand as well as tight Malaysian palm oil stock levels in the first few months of 2009.

'We have always thought that the low price level in the first quarter of this year was not a sustainable level to begin with. We have always expected the price to move up,' said Mr Lee.

'The major consuming countries, China and India, their economies have not been that badly affected by the prevailing global downturn,' he added.

Mr Lee said Malaysian palm oil production should pick up in the second half of the year due to the seasonal uptick in output as yield stress fades. He pegged June palm oil stocks at 1.5 million tonnes, an increase of 9.5 per cent from a month earlier. -- Reuters