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Spike In Fertiliser Prices Translating Into Higher Cost Of Production For 2022

Most fertiliser prices soared since mid-21 driven by strong demand, supplies constraint and higher input costs. The cost of production based on current fertiliser prices is estimated to be 15-20% higher yoy for 2022, which will offset the earnings impact from high CPO ASP. High prices are not the only issue, as it is also getting tougher to acquire supplies. Thus, the sector may again suffer from low fertiliser applications in 2022. Maintain UNDERWEIGHT.

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WHAT’S NEW

• Spike in fertiliser cost will increase cost of production by 15-20% for 2022. Current high fertiliser prices will translate into higher fertiliser costs for 2022 production. We estimated that could lead to at least a 15-20% increase in cost of production for 2022 provided planters have locked in the price in mid-21. The two main fertilisers for oil palm are nitrogen and phosphorus
whereby the prices have increased more than 100% over the last six months driven by supply disruption, strong demand and higher input costs. Fertiliser cost is another major cost component after labour cost for oil palm producers, which is about 30-35% of ex-mill cost.

• Fertiliser delivery is another challenge. Companies may continue to apply full fertiliser programmes despite the high price, but they may not be able to receive the ordered volume due to supplies constraint and uncertainty on shipment arrangement. Malaysia and Indonesia are highly dependent on imported fertiliser but Indonesia is at a slight advantage as local ammonia production is sufficient to meet the domestic requirement. Based on our channel check, the estimated fertiliser imports for 2021 are just about 60-65% of the usual annual requirement. As the logistics bottleneck is unlikely to be solved anytime soon, 2022 could see even lower fertiliser imports volume.

• Smallholders may again cut fertiliser applications. Smallholders may consider reducing fertiliser applications in order to maximize the return after suffering from low income for many years when CPO prices were low. Smallholders make up 45% and 35% of total oil palm planted areas in Indonesia and Malaysia. The impact of the reduction of fertiliser back in 2018 and 2019 is showing today as the yield recovery is slower and weaker than usual. As a result, production growth from Indonesia and Malaysia may not be able to deliver much growth for 2022.

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ACTION

• Maintain UNDERWEIGHT. Despite the recent share price recovery, the sector still underperformed the market in all three markets, ie Indonesia, Malaysia and Singapore. The recent share price recovery should be a one-off re-rating for the potential high earnings growth for 2021. However, looking at smaller earnings growth for 2022 and an earnings contraction for 2023, we do not foresee any strong catalyst for the sector to outperform the market. Advocate selling into strength and maintain UNDERWEIGHT. For investors that must invest in this sector, we prefer companies with growth and good cash flow for potential good dividend, such as Kim Loong Resources (KIML MK), Hap Seng Plantations (HAPL MK), Sarawak Oil Palm (SOP MK ), KLK (KLK MK) and First Resources (FR SP).