FocusSE Asia’s palm oil challenges could boost Africa’s fertilizer demand

13 July 2011 16:05  [Source: ICIS news]

LONDON (ICIS)--Malaysia’s palm oil sector is facing some local challenges, but ultimately fertilizer demand from palm oil companies is set to grow, particularly as companies expand into Africa, according to industry sources in southeast Asia.

“Is the entire picture rosy? Well, maybe not,” said one Indonesian producer, who also has operations in Malaysia. “There are challenges on the ground in how the [palm oil] industry copes with putting in new processes.”

The new processes are a result of significant legal changes in the region. Government laws have been set to help minimise environmental damage, like deforestation and greenhouse gas emissions, from the palm oil sector, and maximise sustainability. Additionally, the lack of highly-skilled legal professionals to navigate the new processes will have a short-term impact on palm oil growth in the region, thereby stagnating fertilizer consumption locally – but only for a few years.

“As the big boys [get used to the new government standards], the small guys will follow,” said the producer.

These developments are just a few of the challenges listed in a US Department of Agriculture (USDA) June 2011 report, which indicates that Malaysia’s three-decade long palm oil growth trend is set to decline, soon after it reaches its peak production in 2020.

Since the financial recession of 2008, crop yields have dropped dramatically. The USDA says this is due to decreased fertilizer use, adverse weather and high crop prices, which have led to sub-optimal crop cultivation.

Instead of replanting new trees which would – in time – produce higher crop yields, plantations have opted to continue harvesting from trees that have matured past their optimal crop production.

But fertilizer imports are on the rise for the southeast Asia region as a whole, according to producers. Several confirmed that their fertilizer application and purchasing habits have not changed, and in fact have grown since 2008.

“There’s not much [plantation land] in Malaysia now, but Malaysians are the second largest plantation owners in Indonesia,” said the Indonesian producer. “Indonesia is still poised for growth – it is not [a] mature [market].”

Beyond this, the high price for palm oil crops and a strong demand for edible oils and biodiesel feedstock are driving company expansions elsewhere, shifting and increasing fertilizer demand in new places.

Africa has become the choice locale for several palm oil company expansions. In May this year, plantation firm Sime Darby leased 22,000 hectares of land in Liberia. The company also has continuing ambitions in Cameroon. Late last year, fellow player Wilmar began developing plantations in Nigeria.

Other palm oil giants, such as Sinar Mar and Olam International, have set their sights on Uganda, Mozambique, Ghana, Gabon and Côte dIvoire. A few Chinese companies are understood to be purchasing land in West Africa, seeking to develop rice crops in the region.

But the unique aspect of palm oil plantations is that they provide a long-term producing, high-yield crop that does not have a particular off-season – which would also require consistent, year-round applications of fertilizer imports.

“It’s a 15-plus year investment, and a long term commitment,” a Malaysian producer said.

Similarly, there is also concern over the long-term impact of taking land away from local community farmers. However, advocates of African expansion argue that plantations will increase job opportunities for low-skilled labourers and improve exports, while contributing positively to the country’s balance of trade.

Also, producers say palm oil production for these African regions would not be mechanized – as southeast Asia’s processes are generally not mechanized. That means the type of agricultural development envisioned would not result in rapid urban migration – as was the case during China’s agricultural revolution.  And fertilizer producers are well aware of the potential in a smooth transition.

“We definitely see Africa as a region for potential growth,” said a representative of Arab Potash Company, a fertilizer producer in Jordan. “We can see good things are starting to happen there, slowly, but it’s happening.”

Statistics show there is room for such growth. In 2008, fertilizer consumption for the entire African continent, of roughly 1bn people, was reported at 2.9bn nutrient tonnes, according to International Fertilizer Association data. That same year Brazil, with a population of 200m people, consumed nearly the same amount of fertilizer – 2.5bn tonnes.

But the growth presents a massive challenge as well. Africa’s population represents 15% of the world’s total, but its fertilizer consumption is less than 3% of the world’s total output. And the consumption trend has only changed negligibly in the last few years.

Another possible consequence of agricultural expansion in Africa could be a strong demand boost for sulphate of potash (SOP), as the specialty fertilizer product is low in chloride and ideal for arid climates and highly saline soils.

“The only problem [about African demand increases] is that SOP is sold at a premium,” said a European SOP producer. “Someone has to pay for it, and places like Egypt are importing it – they need it – but I’m not sure the rest of Africa has the ability to buy just yet.”

Despite this, Indonesian producers say current events are promising. The fact that the agricultural industry in Cote d’Ivoire continued, despite internal unrest over last year’s contested election, is seen as a sign of growing stability. The successful January 2011 referendum for South Sudan, which officially became autonomous on 9 July, also demonstrates the growing success of democracy.

All these positive aspects could set Africa as the growth engine behind the palm oil sector in coming years, replacing some of southeast Asia’s maturing markets. And fertilizer will necessarily be a big part of any successful expansion plans.

“Let’s keep our fingers crossed that Africa continues to be stable and enjoys the fruits of development,” said the Indonesian palm oil producer. “[Growth] will happen, as it becomes more and more compelling for businesses to be there.”

($1 = €0.71)

For more information on fertilizers, visit ICIS Pricing Fertilizers

By: Lauren Williamson
+44 (0) 20 8652 3214

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