Golden Agri-Resources believes crude palm oil (CPO) prices will be well-supported this year with output across the industry possibly falling by 5 per cent to 10 per cent.
The firm's view is based on the impact of last year's severe El Nino weather pattern and an expected rise in demand in Indonesia as a result of a government mandate for increased biodiesel use.
"We are confident about the supply-demand fundamentals for palm oil. We expect further support for CPO prices because after the severe El Nino last year, that could be followed by La Nina, which brings a lot of rain, and that could potentially reduce production in 2017," Mr Richard Fung, director of investor relations, said yesterday. "Given the condition of the plantations last year, output could be reduced by 5 to 10 per cent compared with last year, which could have a significant impact on CPO prices," he added.
The sharp depreciation in the rupiah against the US dollar last year also helped reduce the palm oil plantation company's costs as "60 per cent of our costs are rupiah-based," Mr Fung said.
Analysts say the plantation firm's profitability this year could increase through efforts to boost contribution from its oilseed-crushing plant in China, and if CPO prices firm on output drop.
The company's decision to replant high-yielding seeds at their existing plantations will likely help reduce capital expenditure, which Mr Fung says is projected to be about US$70 million (S$98 million) this year.
According to RHB Research, Golden Agri is the "only mainboard-listed planter whose full year 2015 results surprised on the upside, due to its downstream and oilseed processing earnings".
RHB, with a buy call on the counter, said its downstream profits improved on increasing refining margins as well as a turnaround in the oilseeds division.
"Although fresh fruit bunch production rose 3 per cent in 2015, the company is guiding for weaker production growth in 2016 (due) to El Nino. We have already imputed a 5 per cent decline this year in our forecast, followed by a 1-3 per cent improvement in 2017 and 2018."
Meanwhile, to mitigate the severity of haze this year, Mr Fung said its peat rehabilitation programme is focusing on cutting the chances of peat drying out and catching fire by maintaining peat water levels.
As part of sustainability efforts, it is also providing smallholders with high yielding seeds for higher oil production without having to open up more land. In December, the firm completed the mapping of its 489 mills, ensuring full traceability to its entire supply chain.
Ms Lim Shu Ling, head of sustainability communications, said it is encouraging communities to move away from slash-and-burn methods and is equipping them to rapidly suppress fires.
Another initiative is its peat ecosystem rehabilitation programme now underway in one of its concessions in West Kalimantan, covering a conservation area of around 2,600ha. This involves rehabilitating the ecosystem of peatland next to established plantations.
