Sime Darby says dry weather could lower palm oil output

Sime Darby Plantation has estimated that the El Nino weather effect and prolonged drought would affect about 6 percent of its palm oil production in Malaysia, and 8-10 percent in Indonesia in the next one to two years, the company told Reuters by email.

"The recent haze would have a similar compounding impact with the prolonged dry period affecting fruits and disrupting oil extraction as well as crop production," said Franki Anthony Dass, managing director of Sime Darby Plantations, the plantation and agri-business arm of Sime Darby Group.

Lower productivity levels in Malaysia, the world's No.2 palm oil producer, could help lift benchmark prices of the vegetable oil. Palm oil's March contract closed 1.2 percent higher on Tuesday evening at 2,411 ringgit ($551.09) per tonne, but down about 3 percent since the start of the year.

The Malaysian plantations-to-motor-conglomerate also expects to see a decline in fresh fruit bunch (FFB) production this year due to the El Nino impact.

Forecasts for its Malaysian FFB output stood at 5.58 million tonnes, down from 5.94 million tonnes the year before, and forecasts for its Indonesian FFB output is seen at 2.75-2.81 million tonnes, down from 3.05 million tonnes a year ago.

However, overall FFB output for the group in the financial year ending June 2016 is seen up at 10.05-10.11 million tonnes from the year before, due to its acquisition of Papua New Guinea-based New Britain Palm Oil. Sime Darby recorded 8.9 million tonnes of FFB output the financial year before.

"New Britain Palm Oil is expected to contribute about 1.72 million tonnes of FFB for financial year 2015/2016," said Dass.

Analysts have forecast declining FFB yields this year in anticipation of a dry El Nino weather impact. Sime Darby's expectation of a 6 percent decline for its Malaysian operations is significant, but not totally unexpected, said Alan Lim, an analyst at MIDF Research in Kuala Lumpur.

"It is not a surprise as the Australia Bureau of Meteorology has formally announced the El Nino since May 2015. Hence, the market had already look ahead into lower FFB production by plantation companies," he said.

"The net impact to earnings is not expected to be huge, as CPO prices usually increase during the period of insufficient supply globally. Historically, the impact of CPO prices to earnings will more than offset the loss in FFB production."

Sime Darby saw falling net profits in its last earnings announcement. Its net profit for first-quarter ended September 2015 fell 34 percent on weaker demand in its consumer business and low commodity prices.