Asia palm oil makers to see strong 2008 – Fitch

07 January 2008 03:37  [Source: ICIS news]

SINGAPORE (ICIS news)--Fitch Ratings expects Asian crude palm oil (CPO) producers to continue generating strong positive operating cashflows backed by buoyant prices in 2008, it said on Monday.

The outlook for palm oil producers was also expected be stable this year as most companies within the sector would continue to sustain investments in palm oil plantations and downstream assets, and make high shareholder distributions, the ratings service said.

Since mid-2006, CPO prices have escalated substantially to reach around $880/tonne (€598/tonne) FOB (free on board) Malaysia by the end of 2007, mostly driven by its demand as a feedstock in the production of biodiesel, Fitch said.

However, only around 5% of the total world production of CPO was used for this purpose, it added.

A strong correlation now exists between the CPO prices and global mineral crude oil prices.

At the same time however, high crude prices and the relative price of CPO against other vegetable oils still made it an attractive feedstock in the production of biodiesel, Fitch said.

"The demand for CPO will continue to grow as support continues for green energy in many countries and the demand for edible oil expands in markets such as China and India," said Buddhika Piyasena, director with Fitch’s corporate ratings team in Singapore.

Although CPO production in the major producing countries, Indonesia and Malaysia, is expected to rise in 2008, such incremental capacity will be easily absorbed to fill the anticipated gaps in the edible oils sector created by production shortfalls expected in other oil seeds such as soybeans, canola and sunflower.

Fitch believes that suitable land shortages in Malaysia will continue to drive Malaysian palm oil companies into Indonesia.

"Furthermore, supported by the strong operating cash flows, operators may continue to consider acquisitive growth strategies and mergers seeking growth, scale and vertical integration benefits despite the high asset prices that have adjusted to reflect the currently high CPO prices, Piyasena said.

"Cost management will also receive a lot of attention given the escalating operational costs such as fertilizers and labour."

Environmental issues would receive greater attention in 2008, said Piyasena.

There has been much debate on the use of palm oil in biodiesel production and the adverse environmental impact of clearing land for oil palm cultivation.

The challenge of tracing palm oil beyond the millers has made it difficult to introduce a credible certification of the environmental friendliness of CPO, which will be a considerable challenge for the industry.

Any barriers for CPO in the biodiesel industry owing to this can potentially affect CPO prices to some extent, although demand for the commodity is supported in the edible oils space, Fitch said.

Major palm oil producers in the region include Malaysia's IOI Corp, Singapore's Wilmar International and Indonesia's Golden Agri-Resources.

($1 = €0.68)

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By: Jeanne Lim
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