Insight - Preparing for further price volatility in palm oil


Downstream shift: The shift towards downstream products for Sime Darby Plantation will also help to alleviate some of the risks normally associated with upstream business.

DEMAND from India for Malaysian palm oil has improved significantly with shipment volume rising to above 120,000 tonnes in May after four months of muted growth.

This renewed buying from India came on improved trade relations between the two countries; India’s vegetable oil stocks had also been reduced significantly due to lower imports and domestic production.

Demand for palm oil from China is seen to be gradually recovering as more companies in the food service and hotel sectors reopen for business.

“China is likely to buy more palm oil in the third quarter of 2020, to cater for festive demand and replenishment of inventory, ’’ said Sime Darby Plantation (Sime Plant).

Following the noticeable pick-up in commercial buying from India and China recently, there is potential for more active buying as the lockdown eases in both countries of heavyweight purchasers.

“With Malaysian palm oil currently at an attractive discount (of US$15 per tonne) compared to its Indonesian counterpart (which raised its palm oil export levy by US$5 per tonne), the demand from these price sensitive countries will remain intact, ’’ said Sime Plant.

A worker monitors a freight car filled with harvested palm oil fruit bunches being lifted inside a mill at the <a href='/business/marketwatch/stocks/?qcounter=UTDPLT' target='_blank'>United Plantations Bhd</a><a href='http://charts.thestar.com.my/?s=UTDPLT' target='_blank'><img class='go-chart' src='https://cdn.thestar.com.my/Themes/img/chart.png' /></a> oil palm estate in Perak, Malaysia. - FilepicA worker monitors a freight car filled with harvested palm oil fruit bunches being lifted inside a mill at the United Plantations Bhd oil palm estate in Perak, Malaysia. - Filepic

While the outlook for palm oil has improved, Sime Plant aims to mitigate risks of being too dependent on traditional markets.Through its downstream operations under Sime Darby Oils, the group is able to move beyond crude palm oil (CPO) bulk business and increase its share in the higher value frying, specialty oils and fats market.

Moving forward, demand for palm-based specialty products is set to be strongest for industrial frying, bakery and confectionery consumption, especially for markets like India and the Middle East which have strong growth potential for specialty products.

Other markets for Sime Darby Oils include South-East Asia, the United States, Europe, Africa and China.

The shift towards downstream products will also help to alleviate some of the risks normally associated with upstream business, such as increasing costs of labour and fertilisers, shortage of labour as well as other socio-economic and political influences.Despite the positive outlook on palm oil, the group is prepared for further price volatility as among other factors, the global economy continues to be impacted by the pandemic.

It believes that its focus on value creation and prudent cost management will help it weather the challenges ahead while delivering optimum results.

For 2020, its strategy will also entail initiatives to deliver value through deleveraging via asset monetisation of non-core and under-performing assets and cost rationalization.

In the first quarter, Sime Plant sold a piece of land in Malaysia for RM279mil, with a total profit of RM262mil.

It aims to record RM1.5bil in land sales in financial years 2020 and 2021.

The group is also aiming for a more balanced profit contribution from upstream and downstream businesses.

Upstream operations gained a profit before interest and tax of RM288mil in the first quarter, against RM103mil in the previous corresponding quarter.

This was contributed by higher CPO and palm kernel prices which rose by 29% to RM2,605 per tonne and RM1,519 per tonne respectively compared with the same quarter last year.

Downstream earnings increased to RM89mil versus RM85mil in the previous corresponding quarter, largely on the sale of differentiated products in Europe.

Macro-economic factors such as US-China trade tensions will invariably lead to the volatility of CPO prices.

The downstream operations enable the group to switch sale offerings between CPO and differentiated products, thus, hedging against any potential impact on its export revenue.

Sime Darby Oils can venture into more specialty products such as shortening or high-quality cooking oil.

China’s decision against setting a target for gross domestic product growth for the first time in decades is due to the great uncertainty surrounding global trade and economies.

However, Sime Plant expects demand from China for palm oil, an essential ingredient in food and non-food products, to continue.

In the case of a prolonged pandemic, the palm oil industry will not be spared from the repercussions which could include a decline in China’s domestic consumption.

But the extent of this impact on the palm oil industry can only be fully ascertained as the situation surrounding the pandemic unfolds in the coming months.

Apart from the health and safety of its 94,000 strong workforce in 16 countries, the group’s priorities during these difficult times are also to ensure job protection for its employees and maintain optimum cash conservation.

“We will also continue to leverage on any opportunity to fast-track our drive towards efficiency and productivity, ” said Sime Plant.

Besides factors such as extreme weather conditions, sustainability requirements and changing consumer preferences, the group now has to deal with new challenges arising from a tough health crisis worldwide.

Columnist Yap Leng Kuen notes that diversification downstream is gaining traction for Sime Plant. The views expressed are the writer’s own.

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