THE armed incursion of the self-proclaimed Sulu Royal Army into Lahad Datu, Sabah, has brought regional tensions to a head in Malaysia's largest palm oil-producing state.

While the government reports that the situation has been contained, the three-week-old conflict that has claimed 60 lives, including eight Malaysians, casts a shadow of uncertainty over the state's position as the most fertile ground for plantation operations.

Analysts and industry players expect the conflict to have some negative impact on planters around Lahad Datu, albeit minimal, as logistics and harvesting could be disrupted for the time being.

There are concerns, however, that the incursion could be the start of a long-drawn-out insurgency that will lead to serious operational problems and affect the output of plantations in Sabah that account for about 30% of the country's mature planted oil palm estates.

Sabah's crude palm oil (CPO) output in 2012 was over 5.5 million tonnes worth an estimated RM15.3 billion based on last year's average CPO price of RM2,764 per tonne, according to a report by Singapore's Institute of Southeast Asian Studies.

While the government has downplayed the conflict's impact on the industry, the proximity of oil palm plantations to the affected zone cannot be ignored.

The first landing of an estimated 200 gunmen armed with M-16 assault rifles and rocket launchers is reported to have taken place on Felda Global Ventures Holdings Bhd's (FGV) 96,000ha oil palm estate in Sahabat.

At the time of writing, the militants were reported to have been confined to Kampung Tanduo and Kampung Tanjung Batu in a joint operation by the Malaysian police and military. Some believe the conflict is unlikely to be easily forgotten while others say a long-term solution is not likely to be found soon.

"The entire east coast of Sabah is populated by the Suluk people from the Philippines who have settled down in Malaysia. They are dark-skinned and tall, virtually indistinguishable from the militants. If these militants put down their guns, how can they be told apart?" asks a veteran industry player who is a pioneer of oil palm planting in Sabah.

Lahad Datu is about 1½ hours from international waters by speedboat while some areas along the east coast are only about 20 minutes away from the Philippines.

"The Suluk people have been going in and out of Malaysia for a long time. They don't need passports and there is no immigration. How do you control that?" asks the veteran industry player.

"The Suluk people can be violent. Back in the 1980s, when we were setting up oil palm estates in Sahabat, we had cases where they killed each other."

Market watchers draw a parallel between the situation in Sabah and the resource-rich southern Thailand where Muslim rebels claiming autonomy have long clashed with Thai forces. The rebels have routinely destroyed infrastructure and made transport difficult, which has contributed to a greater cost of doing business in the area.

Business as usual?

On the ground, it is business as usual for the majority of the planters. Operations at the oil palm estates, like harvesting and running of the mills, are still going on, but security has been tightened. Private security forces who protect the estates have been instructed to be in plain clothes, says a local planter. This is so that the guards are not mistaken for the military or police officials by the Suluk insurgents, he explains.

While the militants have not attacked any plantation, one planter is concerned that if the security situation deteriorates, the majority of Indonesian workers on the plantations will leave. Already, the industry is suffering from a shortage of workers, especially since the wages of estate workers in Indonesia rose last year.

Last week, Minister of Plantation Industries and Commodities Tan Sri Bernard Dompok dismissed reports that operations at plantations in Sabah would be disrupted by the conflict. So far, only FGV has revealed that it is unable to access 1,000ha of estates located close to the scene of fighting, but they account for less than 1% of FGV's operations in Sahabat.

"Hap Seng Plantations Holdings Bhd's operations have not been affected while Genting Plantations Bhd has suspended the transport of CPO from two of its five mills to Lahad Datu for security reasons," writes CIMB Research in a note.

"This is negative for refiners and planters in Sabah as productivity and the shipment of CPO could be affected. For every 1% change in fresh fruit bunch output, earnings may be dented by up to 2%," the research house says, adding that FGV and Kuala Lumpur Kepong Bhd have the largest exposure with a refinery each in Lahad Datu.

Analysts say any supply disruption now will have little impact because CPO supply growth is seen to outpace that of demand on high stockpile. On top of that, it is close to low production season for CPO.

Still, what happens on the diplomatic front in the next few months could affect the operations of planters located between Lahad Datu and Sandakan, an area that is considered the most fertile for cultivating oil palm in Sabah.

This story first appeared in The Edge weekly edition of Mar11-17, 2013.