Opportunities inherent in palm oil industry

Demand for edible oils is expected to rise by an additional 46 million tons by 2020. Palm oil comprises 40 percent of all oils from vegetable sources and is the only source that can deliver these volumes to the world in this period.

Palm oil is an important and versatile vegetable oil that is used as a raw material by both food and non-food industries. Approximately 60 percent of the palm oil we consume can be further processed into a palm oil ‘derivative’ or blend, before it is incorporated into the products we buy from a supermarket. These are used as ingredients within fats of pastries (shortenings), margarines for pastry and cakes, frying oils, coffee whitener and emulsifiers and can also be used in a wide range of food products including gravy granules, suet mixes, frying oils, pastry margarine, snack foods and toffee.

Background

International trade in palm oil started at the beginning of the 19th Century with the development of trades in palm kernel post 1832. Nigeria occupied a strong position in the global palm oil export market in the 20th Century. The country supplied 75 percent of the 157,000 tons of palm kernel exports that originated from the British-colonised West Africa in 1911, and was the world’s largest exporter. According to my research, Malaysia became the world’s largest producer in 1970, but was later surpassed by Indonesia in 2006.

In 2012, Nigeria hit a plateau of 850 million metric tons (MT), while Malaysia and Indonesia are in front with 19,000 (MT ‘000) and 28,000 (MT ‘000), respectively.

Tables have turned now and Indonesia and Malaysia now account for 87 percent of the global output of palm oil, while Africa only accounts for 5 percent. According to some reports, palm oil was almost single-handedly responsible for reducing and eventually eradicating poverty in Malaysia and seriously driving it down in Indonesia. Today, the growth of palm oil plantations in Malaysia and Indonesia is under fire from several quarters, including the environmental lobby and Unilever has announced that it is pulling out of all its plantations. This could provide ample opportunity for Africa to reclaim its original position.

Opportunities

The situation in Africa is vastly different from that in Asia. While companies like Unilever are pulling out of plantations, new investors and companies like Cargill and Olam are taking a closer look at Africa and getting more involved in the region’s palm oil sector.

West Africa is sub-Saharan Africa’s (SSA) palm oil production hub, with output of 2.4 million MT in 2011, led by Nigeria and Côte d’Ivoire. As of 2011, Nigeria was the third-largest producer, with more than 2.5 million hectares (6.2•106 acres) under cultivation. But at the moment, Cote d’Ivoire is the only significant exporter in the region. Most countries run a palm oil deficit, which is met by imports from Indonesia and Malaysia.

In the 1960s, West Africa accounted for over 60 percent of palm oil production, as of 2012, it only accounts for 5 percent and imports almost 60 percent of its palm oil from Malaysia and Indonesia.

Cause…

Although Africa has vast arable land available for palm oil plantation, a large-scale plantations are relatively under-developed with approximately 8m ha of palm oil plantation, only 1.1m ha is used for industrial purposes, 80 percent are harvested by small villages for the local markets. Low yields also blight the sector, averaging just 300kg/ha versus 2.2 MT/ha in Malaysia and Indonesia for example, while rainfall in some African palm producers periodically falls below the minimum 300mm/month required for ideal palm development.

Effect…

As a result, African production growth rates remain low, averaging 2.7 percent per year over the past 20 years, compared with 36.5 percent in Indonesia and 8 percent in Malaysia over the same period. Also, West Africa has run a palm oil deficit for many years, depending on imports from the production hubs in South-East Asia. This can also be attributed to the stagnation of domestic production, causing the region’s share of the global market a continuous fall.

The opportunity… Consumption!

Palm oil forms an essential part of the African diet “as well as being used as a heating, cooking and lighting fuel.” West and Central Africa consumed 5.2m MT of palm oil in 2010, but with total production of only 2.1m MT the region ran a deficit of 3.1m MT, with the largest deficits occurring in Ghana, the DRC and Nigeria. Given the stagnation of domestic production and the surge in demand from West Africa’s rapidly growing and urbanising population, nearly all the countries in the region are net importers of the commodity. Côte d’Ivoire is the only exporter in West Africa. Although Nigeria is by far Africa’s largest palm oil producer “producing around 1m MT per year” and has the third largest area of cultivated oil palms in the world after Malaysia and Indonesia, the country needs to import around 40 percent of its palm oil needs to meet its domestic demand.

Nigeria leading the way…

There has been a renewed focus by the government of Nigeria to address the challenges in this sector over the past five years. The government is making an effort to encourage the average farmer to change their focus from that of supporting themselves on a minimum level to becoming of the nation’s local supplier. The Agricultural Credit Guarantee scheme fund formed in 1977 has been re-ignited. In 2012, N9.7 billion was guaranteed under this scheme, 77 percent more than N5.5 billion guaranteed in 2011.

Interest in West Africa’s palm oil sector from large-scale Asian commodity groups is set to increase in the coming years, especially in the main belt for palm development (Cameroon, Angola, the DRC, Nigeria, Côte d’Ivoire, Ghana and Togo). The emergence of an African middle-class and the improvement in political stability will also support the expansion of palm oil-related projects, as will the pro-palm oil policies adopted by governments.

The enthusiasm of investors for West Africa’s palm oil sector has been supported by high local prices, notwithstanding the decline in international CPO prices over the past two years. After peaking at over $1,300/MT in January 2011, international prices have declined steadily to around $850/MT in early November 2012, in response to signs of ample global supplies and faltering demand.

Malaysian CPO stocks hit an all-time high in September 2012, jumping 17 percent over one year ago to a record 2.4m MT, and with the Malaysian government planning to boost exports over the coming months international prices are likely to remain under pressure.

However, CPO prices have consistently remained higher in West and Central Africa, reflecting the region’s high deficit, low productivity and the increasing competitiveness of palm oil versus other vegetable oils, which is driving up demand. Over the past 15 years, the difference between world and West African palm oil prices has widened from 3.3 percent in 1993 to 54.6 percent in 2011. Most large producers have prices that are close to the SSA average of $2.2/litre, reflecting the fact that they are the largest economies in the region, with the most developed import infrastructure and internal markets.

And with consumption continuing to rise and new projects requiring at least three years to start first production and 15 years to reach full yields, high regional prices are likely to continue for some time.