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Nikkei Markets

Malaysian palm stocks hobble as Mahathir hints at new law

Flags need to hold local firms responsible for fires in land held overseas

KUALA LUMPUR (Nikkei Markets) -- Malaysian palm oil stocks hobbled Thursday after Prime Minister Mahathir Mohamad suggested a need for a law that will hold local planters responsible for fires in land they control overseas as thick haze arising from forest fires in neighboring Indonesia shrouded parts of the country.

Sime Darby Plantation, the world's largest oil palm planter by acreage, fell as much as 2.1% on the Kuala Lumpur stock exchange, while IOI Corporation ended 3.2% lower. The broader Bursa Malaysia Plantation Index shed more than 1%.

If such a law is enacted, plantation companies would need to spend more to tighten controls to prevent forest fires from encroaching into their plantations or closely monitor forest fires during the dry season, said CIMB Investment Bank Analyst Ivy Ng.

"The recent development somehow showed that the efforts the companies put in are insufficient," she said. "They may need more monitoring initiatives."

On Wednesday, Mahathir said Malaysian companies may be asked to put out the fires on estates they own beyond the country's borders. If they are unwilling to act, "we may have to pass a law which would make them responsible for fires in their property even if it is outside Malaysia," he said, without elaborating.

The remarks come as acrid smoke from forest fires in Indonesia blanketed Malaysia and neighboring Singapore, raising health hazards including respiratory problems, and prompting cancellation of flights as visibility dropped.

Air Quality Index in Malaysia's capital city of Kuala Lumpur recorded an "unhealthy" rating of 159 on Thursday with some parts of the country recording "very unhealthy" readings of over 200. Officials have warned that the recurring, cross-border air pollution may worsen in the days ahead.

Cross-border haze has plagued Malaysia and Singapore since the 1980s as prevailing winds blow over smoke from the seasonal burning of forest and peat in Sumatra and Borneo islands, home to vast swathes of palm and timber plantations. Nearly every year, when the acrid smoke wafts over the Malacca Strait, authorities blame few small farmers and accidents for part of the burning. However, several fires are detected in plantation areas owned or to be used by palm oil and pulpwood companies.

The costs and risks to the smaller plantation owners would be higher as compared to bigger players in Indonesia, said RHB Investment Bank Analyst Hoe Lee Leng. A withdrawal of certification from the Roundtable on Sustainable Palm Oil would be costly for the larger planters, she noted.

"Most are not clearing land to plant more anyway" due to weak palm oil prices, Hoe said.

Prices of the edible oil used in everything from snacks to cosmetics have been under pressure tracking a mammoth stockpile and sluggish demand. The most-traded crude palm oil futures contract on Bursa Malaysia Derivatives for December delivery fell 0.5% to 2,248 ringgit a ton on Thursday.

Indonesia has blamed some Malaysian companies for the fires this year. Last week, Indonesia's Environment Minister Siti Nurbaya Bakar named four subsidiaries of Malaysian palm oil producers whose land have been sealed off after fires have been spotted in their estates.

Sime Indo Agro, a unit of Sime Darby Plantation, was among the four named although the company said no action has been taken by the Indonesian authorities to seal off its operations and the recent fire was in fact in lands outside its operational area and occupied by local communities.

IOI Corporation, another company whose subsidiary Sukses Karya Sawit was named in the report, said it did not receive any official notification and several small fires over the last couple of months were quickly extinguished.

Smallholders are often blamed for the pollution caused by slash-and-burn technique in planting of other cash crops because of the faster return than oil palm, which typically starts yielding profit at least after seven years, Maybank Investment Bank Analyst Ong Chee Ting wrote in a Monday report.

Oil palm has a productive lifecycle about 25 years and once planted, the tree matures in about three years, producing fruits all year round, "There is no need to cut and replant oil palm every year unlike other non-perennial crops like sugar cane, padi, vegetables, soybean, tobacco, or oilseeds," he said.

-- Jason Ng and Yimie Yong

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