Thursday, 4 December 2008

Palm oil plantations available as prices drop

Palm oil plantations available as prices drop

By Niluksi Koswanage and Soo Ai Peng Reuters

Published: December 2, 2008

KUALA LUMPUR: A slump in palm oil prices is giving Asia's cash-rich planters a chance to take over smaller companies that mushroomed in recent years as commodities boomed but are now struggling to survive. Sime Darby of Malaysia, the world's biggest palm oil company in planted area, posted a 44 percent rise in quarterly earnings last week.

With a recovery in prices nowhere in sight, now may be the time to look for bargains, analysts said.

Well-established companies like Wilmar International in Singapore and Astra-Agro Lestari, which is listed on the Jakarta exchange, are in a strong position to buy land from what could be forced sales by newer plantations.
The newer estates are takeover targets "because when you first start out in this business, money only goes in one way and that is out," said Martin Bek-Nielson, executive director of the mid-sized United Plantations.

"Takeover possibilities could appear if palm oil prices continue to stay at 1,400 to 1,500 ringgit for the next half year."

Palm oil prices have fallen by two-thirds after hitting a peak of 4,486 ringgit, or $1,239, in March, as commodities tumbled and demand waned. Prices are now near break-even for less efficient plantations.

Sime Darby's chief executive has said the global market turmoil provided a "once in a lifetime" opportunity to acquire undervalued assets. The company has a cash pile of about $1.5 billion.

Previous palm oil price slumps saw little industry consolidation, as there were fewer new estates and many more plantations were better established with mature oil palms.

Demand for palm oil had been bolstered by China's surging economy and record high crude oil prices, which lifted biofuels. Palm oil is used in a variety of products, from chocolate to makeup.

Sime Darby wants nearly to double its land bank to 1 million hectares, or almost 2.5 million acres, by 2011 from its current 522,363 hectares. It will probably do that by buying already planted land.

The two-year boom in prices saw new plantings in Indonesia and Malaysia rise by 1.1 million hectares to 11.4 million hectares, according to analysts and Reuters calculations.

Sime Darby has forecast palm oil prices to tick higher to 1,800 ringgit a ton in 2009. The break-even point for smaller planters is about 1,500 ringgit a ton, according to industry estimates.

"If the current downtrend protracts for a longer period, companies with high production costs will be the first to become distressed," said James Ratnam, plantation analyst at TA Securities in Kuala Lumpur.

The commodity is nine months into its latest downturn. Past troughs in the cycle have averaged 17 months, so some light at the end of the tunnel may enable companies to hold on, analysts said. Goldman Sachs said that, based on the past two cycles, when stock levels start falling, prices could soon bottom out.

Palm oil reserves stood at a record 2.09 million tons in October, according to data from the Malaysian Palm Oil Board.

Although palm prices are low, the cost of planted assets is still 50 percent higher than at the start of the boom. It costs 40,000 ringgit per hectare to buy land in Malaysia's Sabah and Sarawak States on Borneo island, the last frontier for the country's palm oil push, plantation officials said.

Kalimantan, the Indonesian side of Borneo, could be much cheaper, and more acquisitions are likely to happen there.

It is apparent that cash-strapped companies will not participate, "but the big boys that are cash-rich will have a lot to say and do," said Velayuthan Tan, chief executive of IJM Plantations, which bought 32,000 hectares of undeveloped land in Kalimantan.

While Wilmar and IOI, a Malaysian plantation operator, have indicated they will be cautious buyers, they also have large exposures to the downstream refining sector and have relatively high debt-to-equity ratios.
IOI shares have fallen 56 percent this year, while Sime Darby is down 45 percent compared with a 33 percent drop on the broader Malaysian stock index.