THE golden years of investing in the palm oil industry appear to be over. Declining crude palm oil (CPO) prices top the list, but there are more challenges. Over the last few years, cost pressures have mounted on oil palm planters.
Compounding matters is the blame levelled on the palm oil industry for the dreadful haze phenomenon which has hit the sector hard with negative publicity. This is despite the industry’s claim that it has spent billions of ringgit on sustainable practices.
According to Maybank Kim Eng Research, the palm oil industry’s investment returns are no longer attractive, unlike its golden years from 2008 to 2012.
The research house points out that industry profits in the second quarter of 2019 (2Q19) were the worst in recent times, dragged down by sluggish CPO prices.
The numbers speak for themselves. In 1Q12, the combined profits of Malaysian listed palm oil companies under its coverage totalled a whopping RM1.82bil.
But in the second quarter of this year, that number shrunk to a mere RM191mil. Even just in recent times – 4Q17 – that profit figure still stood at under RM1.5bil.
The research house notes that the 2Q19 results of plantation companies show that the industry is “barely” profitable.
“Some companies are in the red, as the CPO price is below their per unit cost of production.
“Had it not been for the good contributions from the downstream divisions of selected large entities, the industry would have fared worse,” Maybank Kim Eng says.
Citing an example, the research house points out that IOI Corp Bhd, said to be the lowest cost producer in the region, has seen its profits per hectare dropping by more than two times in just a year.
IOI Corp posted an operating profit per hectare of RM2,713 for its financial year ended June 30, 2019 (FY19) compared with RM6,225 in FY18. This was IOI Corp’s lowest profit in 18 years. Before that, its lowest operating profit per hectare stood at RM1,615 in FY01.
While the bigger boys suffer declining earnings, analysts reckon that the smaller players and those less efficient have it even tougher. Many are struggling to break even, with some going into the red.
Yet another factor is the lack of new plantings in both Indonesia and Malaysia.
“The bigger concern for the next two years is the slower growth in mature oil palm areas due to the lack of new plantings in Indonesia and Malaysia since 2015,” Maybank Kim Eng says.
From 2015 onwards, new planting in the palm oil industry has slowed sharply, partly due to a forest moratorium imposed by the Indonesian government. This essentially limits the conversion of forests and peat land for oil palm, pulpwood and logging concessions.
Given the lack of new plantings and slower growth in mature oil palm areas, Fitch Solutions Macro Research forecasts the CPO average selling price to strengthen to RM2,300 per tonne in 2020.
“Prices will rise as global production growth will slow down, at a time when consumption will continue to grow robustly, mainly driven by Indonesia and Malaysia’s resolute biodiesel development policy,” it says.
Is palm oil really to be blamed?The negative publicity surrounding the palm oil industry has been linked to the reoccurring regional haze crisis.
However, some analysts reckon otherwise, saying that smallholders are slashing and burning other cash crops rather than oil palm, resulting in the recent dreadful haze.
According to CIMB Investment Bank’s regional head of plantation research Ivy Ng, there are other perennial crops that have a shorter life-cycle which require replanting every year unlike oil palm which has a 25-year cycle.
Moreover, she points out that big planters would not tear down their reputation after practising the Roundtable on Sustainable Palm Oil principles which strictly adhere to the “no burning” policy for plantations.
“It does not make sense for big planters to do that. I believe the open burning could be due to the negligence of the smallholders during the dry season that can be even caused by a cigarette butt that has not been disposed of properly.
“The burning can be accidental that has originated from neighbouring land that swayed across other plots of land,” Ng notes.
Meanwhile, Maybank analyst Ong Chee Ting echoes similar views that oil palm does not require cutting and replanting every year unlike other non-perennial crops like sugar cane, padi, vegetables, soybean, tobacco and oil seeds.
“Hence, it is inconceivable that the haze is due to oil palm planting,” she points out.
In view of the haze situation, Maybank expects that there could be a minor negative impact on the CPO output next year.
Recall that post-2015’s strong El Nino, Malaysia’s average CPO yield contracted 15% year-on-year to 3.21 tonnes per hectare in 2016.
To stamp out the negative perception of the palm oil industry, Maybank Kim Eng believes the support of sustainable agricultural practices, continuous education and financial support for smallholders are crucial.
Malaysia has made it compulsory for all oil palm planters and smallholders in the country to obtain the Malaysia Sustainable Palm Oil certification by the end of this year. The certification is exclusively for palm oil that is sustainably grown and produced in the country.
Indonesia, on its part, has also made it compulsory for all planters to acquire the Indonesian Sustainable Palm Oil certification.
However, analysts believe that smallholders’ participation in both Malaysia and Indonesia is behind schedule to be certified due to lack of funds, understanding and education.
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