MARKET DEVELOPMENT
Improve Efficiency To Face Low CPO Price
Improve Efficiency To Face Low CPO Price
08/07/2013 (The Star) - The current low crude palm oil (CPO) price has been a major challenge to the plantation companies’ profitability, with their operational margins being pressured by higher production costs this year.
Rabobank International, in its latest industry report, said although the CPO prices were still higher compared with the cost of production, companies would still need to seek efficiencies through better farming practices to gain the competitive edge and prevent margin errosion.
It pointed out that plantation companies which have better yields with operations in the region as well as lower labour costs would be better placed to manage the current challenges.
The CPO cost of production both in Indonesia and Malaysia have increased at an annual rate of 6% and 9% respectively, between 2008 and 2012.
The cost of CPO production is estimated to range between US$300 and US$500 per tonne of CPO last year although it varies widely due to differences in farming practices, age of the plantations, application of inputs and certifications.
“At these cost levels, plantation companies can still generate significant margins albeit lower than the previous years.
“Even when CPO prices fell to RM2,100 (US$700) per tonne level in the fourth quarter 2012, EBITDA (earnings before interest, taxes, depreciation and amortisation) margins are were still relatively high at 20% to 25%,” the bank noted.
A further decline in CPO price levels could put pressure on margins, especially for less efficient players, smallholders and those incurring costs for accreditation and certification.
Hence, deteriorating margins could also prompt some of the less-efficient plantation operators and smallholders to consider their strategic options.
According to Rabobank, the key cost components of CPO production are fertiliser, labour and plantation upkeep, with fertiliser and labour together accounted for more than 50% of the total.
On average, the cost share of fertiliser and labour increased by 20% and 6%, respectively between 2009 and 2012. The increased share of fertiliser costs is not only due to rising fertiliser prices but also higher use.
The bank pointed out that fertiliser use is closely linked to CPO prices.
“Fertiliser application increased between 2009 and 2011, driven by higher CPO prices,” it said, adding that the rise in fertiliser prices in recent years were also supported by the gain in CPO prices up until 2012.
Given Rabobank’s softer outlook in fertiliser prices this year, it is vital that fertiliser cost component is managed efficiently, especially as “CPO prices had shown a downtrend since August last year and are expected to remain subdued for the rest of this year.”
On labour, the bank said the wage increase in Indonesia had aggravated the shortage of skilled labour in Malaysia.
“The result of labour shortage and the need to retain skilled workers in Malaysia will not only see further wage escalation but also impact yields due to lower harvesting and collection efficiencies,” it added.
Rabobank International, in its latest industry report, said although the CPO prices were still higher compared with the cost of production, companies would still need to seek efficiencies through better farming practices to gain the competitive edge and prevent margin errosion.
It pointed out that plantation companies which have better yields with operations in the region as well as lower labour costs would be better placed to manage the current challenges.
The CPO cost of production both in Indonesia and Malaysia have increased at an annual rate of 6% and 9% respectively, between 2008 and 2012.
The cost of CPO production is estimated to range between US$300 and US$500 per tonne of CPO last year although it varies widely due to differences in farming practices, age of the plantations, application of inputs and certifications.
“At these cost levels, plantation companies can still generate significant margins albeit lower than the previous years.
“Even when CPO prices fell to RM2,100 (US$700) per tonne level in the fourth quarter 2012, EBITDA (earnings before interest, taxes, depreciation and amortisation) margins are were still relatively high at 20% to 25%,” the bank noted.
A further decline in CPO price levels could put pressure on margins, especially for less efficient players, smallholders and those incurring costs for accreditation and certification.
Hence, deteriorating margins could also prompt some of the less-efficient plantation operators and smallholders to consider their strategic options.
According to Rabobank, the key cost components of CPO production are fertiliser, labour and plantation upkeep, with fertiliser and labour together accounted for more than 50% of the total.
On average, the cost share of fertiliser and labour increased by 20% and 6%, respectively between 2009 and 2012. The increased share of fertiliser costs is not only due to rising fertiliser prices but also higher use.
The bank pointed out that fertiliser use is closely linked to CPO prices.
“Fertiliser application increased between 2009 and 2011, driven by higher CPO prices,” it said, adding that the rise in fertiliser prices in recent years were also supported by the gain in CPO prices up until 2012.
Given Rabobank’s softer outlook in fertiliser prices this year, it is vital that fertiliser cost component is managed efficiently, especially as “CPO prices had shown a downtrend since August last year and are expected to remain subdued for the rest of this year.”
On labour, the bank said the wage increase in Indonesia had aggravated the shortage of skilled labour in Malaysia.
“The result of labour shortage and the need to retain skilled workers in Malaysia will not only see further wage escalation but also impact yields due to lower harvesting and collection efficiencies,” it added.