Palm oil shares tumble on sudden 154 per cent spike in foreign worker levy

Due to the labour-intensive nature of the industry, the rise in the levy from 590 ringgit to RM1,500 per month will see planters forking out an additional RM910 per worker.

 

This is based on the feedback from industry players, who expect the impact to be felt in their bottom line this year.

 

Yesterday, major plantation companies that are part of the FTSE Bursa Malaysia KL Composite Index (FBM KLCI) were among the largest decliners on the exchange.

 

Sime Darby Bhd fell 50 sen to close at 7.57 ringgit, while IOI Corp Bhd fell 23 sen to 4.62 ringgit. Kuala Lumpur Kepong Bhd fell 40 sen to close at 23.50 ringgit. All together, the three contributed to a decline of eight points in the FBM KLCI. The index fell 14.62 points to close at 1,653.18 points.

 

Industry players generally are expecting a potential cut in their earnings of between 3 per cent and 8 per cent this year from the unexpected hike in the foreign worker levy, which takes effect this month.

 

CIMB Research expects a potentially higher earnings cut at Felda Global Ventures Holdings Bhd (FGV) and Hap Seng Consolidated Bhd, given their lower earnings base and higher earnings exposure to palm oil.

 

Depending on the sheer size of their foreign worker workforce, the research unit expects that listed planters would need to pay an additional cost of between 5 milion ringgit and 30 million ringgit this year for the new levy.

 

Currently, foreign workers represent about 80 per cent of the total workforce in oil palm estates nationwide. The key cost components of crude palm oil (CPO) production are fertilisers, labour and plantation upkeep, with labour and fertiliser representing over 50 per cent of the total.

 

The labour cost (especially palm fruit harvesters) alone is about 30 per cent of local planters’ current total cost of production, which averages about 1,450-1,500 ringgit per tonne of CPO. In Malaysia, most listed plantation companies generally hire over 6,000 foreign workers, with FGV and Sime Darby Bhd being the highest, each hiring almost 30,000 foreign workers.

 

CIMB Research in its latest report said FGV and Sime Darby could end up paying an additional cost of over 20 million ringgit this year from the new foreign worker levy, while other planters with below 10,000 foreign workers could fork out between 5 million and 10 million ringgit this year.

 

FGV group president and chief executive officer (CEO) Datuk Mohd Emir Mavani Abdullah told StarBiz that the sudden move would push up the company’s cost drastically.

 

FGV currently employs 29,000 foreign workers across its 134 plantations, he said, adding that “the company is still in need of another 5,000 workers to ensure continuous effectiveness in its plantations”.

 

FGV would like to highlight that the palm oil industry as a whole has been affected by the slump in CPO prices and the strengthening of the US dollar.

 

The CPO price slumped to a six-year low in August 2015 and the US dollar strengthened against the ringgit by 18 per cent, with the US dollar and ringgit exchange rate closing at a high of 4.45 ringgit in December last year.

 

Therefore, Emir said FGV was appealing to the Government to reconsider its decision to increase the levy for foreign workers in the plantation sector.

 

“The increase is bearable for the FGV Group only if the CPO price goes above 2,800 ringgit per tonne,” he added.

 

The three-month CPO futures contract is currently trading at its highest since May 2014, up by 77-2,520 ringgit per tonne as at 5pm yesterday. For Sabah-based IJM Plantations Bhd, its CEO and managing director Joseph Tek Choon Yee said: “With our over 3,500 workers and the additional 910 ringgit per worker under the new levy, it will work out to be about 3.2 million ringgit this year.”

 

Tek, who is also the Malaysian Estate Owners Association president, said the association was hoping that the authorities would reconsider this unabated and untimely 154 per cent hike, given the low crop production on the back of the rising cost of production and unattractive CPO spot prices. In the context of Sabah planters, there are many dependents in addition to the workers.

 

“The dependents are less productive and they too need to be subjected to the levies and subsequently are also subjected to the supposed increment in the minimum wage to be implemented this July,” added Tek.

 

Meanwhile, oil palm plantation players at a dialogue session with Plantation Industries and Commodities Minister Datuk Amar Douglas Uggah Embas hosted by the Malaysian Palm Oil Council in Kuching yesterday have also raised concerns over the new foreign worker levy.

 

Sarawak Oil Palm Plantation Owners Association chairman Datu Vasco Sabat Singkang said the new levy on foreign workers came as a big shock for its members as “this would tremendously increase their operational cost”.

 

He pointed out that most Sarawak planters were heavily dependent on foreign workers, mostly Indonesians, in the estates.

 

To lessen the impact of the hike, Sabat urged the Government to alternatively extend the number of years for foreign workers allowed to work in Sarawak probably to four or five years.

 

Tek also urged the Government to defer the implementation of the minimum wage from 900-1,000 ringgit in Peninsular Malaysia and 800-920 ringgit in Sarawak and Sabah from July 1 this year.

 

On the windfall profit tax on palm oil, he said the Government should consider abolishing it, as “it holds no relevance in today’s environment”.