How Sarawak planters could suffer from Wilmar's new sourcing policy

They may lose RM400m in sales tax revenue.

According to CIMB, it expects Wilmar's new sourcing policy to affect some but not all Sarawak planters starting 2016. This is because Wilmar will continue to buy from palm oil suppliers who have committed to abstain from developments in forest and peat areas after 31 Dec 2015.

The new policy may cause Wilmar to lose some suppliers from Sarawak but we do not expect the impact to be significant.

Here's more:

Between the two Sarawak planters under our coverage, Ta Ann may be impacted more compared to Jaya Tiasa as the former will still be planting up its landbank after end-2015.

Jaya Tiasa plans to plant up its remaining landbank with oil palm estates by 2014. We retain our Neutral call on the sector and our top sector picks – First Resources, Ta Ann, Wilmar, Astra Agro and London Sumatra.

What Happened
It was reported that Sarawak may lose some RM400m in sales tax revenue per year from oil palm products following the decision of Wilmar to stop buying crude palm oil (CPO) from mills in the state.

Wilmar, which owns a refinery plant in Bintulu, has informed the state government that it will stop buying CPO produced from oil palm trees planted in forest areas and peat swamp land in the state from 2015 onwards. State Land Development Minister Tan Sri Dr James Masing said the state government will not bow to such pressure from Wilmar.

What We Think
We think that the news is slightly misleading as we understand that the new procurement policy will not affect planters who have committed to abstain from developments in forest and peat areas after 31 Dec 2015. As such, this policy will only affect Sarawak planters that plan to expand in peat areas from 2016 onwards.

The adoption ofthis policy can cause Wilmar to lose some customers in Sarawak but it will not have any material impact on the group's earnings as we estimate that Sarawak accounts for only 3% of the group's total global refining capacities.

We expect some of its suppliers to be fully compliant by end-2015. Jaya Tiasa, which sells all of its CPO to Wilmar, plans to complete its new plantings by end-2014. As such, the group will not be affected by this new policy.

Ta Ann may be affected as it is likely to continue planting in Sarawak (some of which may be peat land) after 2015. The group will have to sell to other refiners (ex-Wilmar) in Sarawak, if it does not meet the more stringent policy.

According to MPOB, there are six palm oil refineries in Sarawak with a total capacity of 2.9m tonnes and the state produces 3.1m tonnes of CPO (or a 16% share of Malaysia's total output).