MARKET DEVELOPMENT
Influx of Cheaper Palm Oil Harming Local Producers
Influx of Cheaper Palm Oil Harming Local Producers
05/06/2014 (BusinessDay) - The increased importation of cheap palm oil into the country is causing a glut in the market, thereby eroding margins of local producers and stifling the growth prospects of companies in the sector.
These imports are also threatening to undermine the government’s supportive reforms in revamping a sector that has been neglected for decades.
The cumulative revenues of the two largest operators in Nigeria’s oil palm sector, Okomu Oil Nigeria plc and Presco Nigeria plc, shrunk by 18.93 percent to N17.45 billion for the year ended December 2013, from N21.40 billion in 2012.
Net margin, which measures the efficiency and profitability of a firm, declined to 19.77 percent cumulatively for both firms in 2013, from 33.08 percent in 2012.
“Investors are concerned global oversupply and weaker demand for palm oil will further weaken the company’s income,” Wale Okunrinboye, an analyst at Lagos-based Asset & Resource Management, said last October in anticipation of the fall in Presco’s full-year revenue.
“The lower global price is prompting importers to boost their business, and eroding the pricing power of local producers,” he said.
The position of the companies has also been affected by the decline in palm oil prices at the international market since 2011 on increased supply from Indonesia and Malaysia.
The aforementioned price fell by 14.25 percent in 2013 and 11.20 percent in 2012 as cheaper products from abroad glutted the market, lowering profits.
However, the dominant local operators are unrelentingly and aggressively expanding in order to increase their share of the market.
Both Okomu and Presco are expanding their plantation area aggressively, and by 2020, it is expected that their combined land area would have more than doubled from around 39,000 hectares (ha) in 2012, according to FBN Capital, an equity research firm, in a note recently released.
“In the past five years, both Okomu and Presco have grown their palm oil output by 12 percent on average, faster than 2-5 percent for the overall sector,” said Kingston Nwosu, a research analyst with FBN Capital.
Nigeria, Africa’s leading crude producer and most populous nation, ranks behind Malaysia and Indonesia as the world’s largest oil palm producer, according to the Food and Agriculture Organisation (FAO).
Nigeria’s palm oil production volume to land area ratio of 0.3 tonnes per hectare (te/ha) compares with Malaysia’s 3.6te/ha and Indonesia’s 3.0te/ha, while on a per capita basis consumption at 8kg is below the global average of 21kg.
Demand for palm oil outstrips local supply by almost 50 percent, according to the FBN Capital report.
It must be noted that the land that is ideal for oil palm plantation in Nigeria totals approximately 24 million hectares. However, little over 3 million hectares of land is being put to use today.
The industry has also been bedevilled by huge operating cost, thus inhibiting growth at the bottom line as cumulative pre-tax profit as reported in their 2013 results tumbled by 38.85 percent to N5.02 billion, from N8.22 billion in 2012.
Okomu Oil had to rely on generators to power its mills for the larger part of the year, according to an industry analyst who craved anonymity.
“For Presco, the inability to deliver on its cost-efficiency drive in 2013 – through the bio-digester programme – was responsible for the increased cost of sales,” the industry analyst said.
The unimpressive performance of local oil palm producers is casting doubts on the country’s ability to reclaim its position as a global leader in palm oil production. Nigeria, which once controlled up to 43.5 percent of the world’s total output of palm oil in the 1960s, is now a net importer of palm oil.
“Although 2013 was a weak year for both companies due to a double-digit decline in prices, we expect a recovery in 2014 on the back of increases in both units and prices,” said Nwosu.
These imports are also threatening to undermine the government’s supportive reforms in revamping a sector that has been neglected for decades.
The cumulative revenues of the two largest operators in Nigeria’s oil palm sector, Okomu Oil Nigeria plc and Presco Nigeria plc, shrunk by 18.93 percent to N17.45 billion for the year ended December 2013, from N21.40 billion in 2012.
Net margin, which measures the efficiency and profitability of a firm, declined to 19.77 percent cumulatively for both firms in 2013, from 33.08 percent in 2012.
“Investors are concerned global oversupply and weaker demand for palm oil will further weaken the company’s income,” Wale Okunrinboye, an analyst at Lagos-based Asset & Resource Management, said last October in anticipation of the fall in Presco’s full-year revenue.
“The lower global price is prompting importers to boost their business, and eroding the pricing power of local producers,” he said.
The position of the companies has also been affected by the decline in palm oil prices at the international market since 2011 on increased supply from Indonesia and Malaysia.
The aforementioned price fell by 14.25 percent in 2013 and 11.20 percent in 2012 as cheaper products from abroad glutted the market, lowering profits.
However, the dominant local operators are unrelentingly and aggressively expanding in order to increase their share of the market.
Both Okomu and Presco are expanding their plantation area aggressively, and by 2020, it is expected that their combined land area would have more than doubled from around 39,000 hectares (ha) in 2012, according to FBN Capital, an equity research firm, in a note recently released.
“In the past five years, both Okomu and Presco have grown their palm oil output by 12 percent on average, faster than 2-5 percent for the overall sector,” said Kingston Nwosu, a research analyst with FBN Capital.
Nigeria, Africa’s leading crude producer and most populous nation, ranks behind Malaysia and Indonesia as the world’s largest oil palm producer, according to the Food and Agriculture Organisation (FAO).
Nigeria’s palm oil production volume to land area ratio of 0.3 tonnes per hectare (te/ha) compares with Malaysia’s 3.6te/ha and Indonesia’s 3.0te/ha, while on a per capita basis consumption at 8kg is below the global average of 21kg.
Demand for palm oil outstrips local supply by almost 50 percent, according to the FBN Capital report.
It must be noted that the land that is ideal for oil palm plantation in Nigeria totals approximately 24 million hectares. However, little over 3 million hectares of land is being put to use today.
The industry has also been bedevilled by huge operating cost, thus inhibiting growth at the bottom line as cumulative pre-tax profit as reported in their 2013 results tumbled by 38.85 percent to N5.02 billion, from N8.22 billion in 2012.
Okomu Oil had to rely on generators to power its mills for the larger part of the year, according to an industry analyst who craved anonymity.
“For Presco, the inability to deliver on its cost-efficiency drive in 2013 – through the bio-digester programme – was responsible for the increased cost of sales,” the industry analyst said.
The unimpressive performance of local oil palm producers is casting doubts on the country’s ability to reclaim its position as a global leader in palm oil production. Nigeria, which once controlled up to 43.5 percent of the world’s total output of palm oil in the 1960s, is now a net importer of palm oil.
“Although 2013 was a weak year for both companies due to a double-digit decline in prices, we expect a recovery in 2014 on the back of increases in both units and prices,” said Nwosu.