Like a bolt out of the blue, palm oil has appeared on the radar of every financial commentator on the planet! Soft commodities (corn, wheat, sugar, palm oil etc) put in good performances in 2007 and many are forecasting a similar result this year. The reason? Well, there is never one easy, simple reason why any product rises or falls in price, but the gurus of the investment community are telling us that the surge in oil prices has had a knock-on effect in the soft commodities market.
Well yes, the connection may not be very evident at first, but many crops such as sugar cane, palm and corn are used to produce, amongst other things, bio-fuels like ethanol and bio-diesel. The surge in oil prices has understandably put up the price of gasoline or, for us British, petrol. This, in turn, has increased the demand for alternative fuels. And low and behold, bio-fuels are derived from crops - crops that five years ago were considered deadbeat investments by many. Suddenly soft commodities are front page news! There are many additional factors affecting the price of crops, but the key driver appears to be a surge in demand combined with poor yields in many crops last year, which has hit stockpiles and pushed the price higher.
There is a handful of palm oil producers listed in London, and they have benefited immensely from the surge in prices, seeing their shares race ahead. So what's the big deal about palm oil? Well, it is in contention with Soybean Oil to be the most widely produced edible vegetable oil on the planet, with in excess of 30 million metric tonnes produced worldwide. It is used as cooking oil, and is an ingredient in margarine and many other food products, and it's also a component in soaps, washing powder and other personal care products. The problem is that rather than being used solely for food and household products, it now finds itself in high demand from the bio-fuel industry, creating a bottleneck as production from new plantations takes years to develop. Many pundits are also concerned that farmers are switching to crops that can be sold to bio fuel refineries, thereby reducing the available suitable land for other crops that are food staples and therefore constraining production.
The major areas for palm oil production are Indonesia and Malaysia, Australia, Africa and other parts of the South-East Pacific, as the optimal yield from plantations is suited towards warmer, wetter conditions. Malaysia is the frontrunner in palm oil production and has its eyes firmly set on capturing a slice of the bio-diesel fuel sector. The first bio-fuel plant opened in Malaysia in December 2007 with annual capacity of 100,000 tonnes, and there are more in the pipeline. Neste Oil has an 800,000 tonnes per annum plant in the works for 2010, and there are a further 14 plants under construction. Indonesia is keen to vie for the top spot, too, with several large bio-diesel refineries under development and Australia is also in the act.
So if you fancy jumping on the Palm oil bandwagon, here are a few companies in the sector (in no particular order)?
New Brit Palm Oil (chart on the left)
(LSE: NBPO) owns an 80% stake in the largest oil palm plantation and milling operation in Papua New Guinea. The operations are located on the western side of New Britain, one of the many islands that make up Papua New Guinea, and the company has a long history of production, starting life in 1965. Annual production in 2006 was approximately 1.05 million tonnes of fresh fruit bunches, which yielded 235,100 tonnes of crude palm oil. New Brit is also in the seed production and cattle breeding industries, but the bulk of revenues come from oil production. Harvesting is conducted year round, with approximately 60% of the crop produced between January and June. The company currently has over 40,000 hectares of palm oil plantations feeding five oil mills and a refinery, making it one of the largest producers in Australasia. The company's timing couldn't have been much better, listing in December 2007 after placing 25 million shares at 250 pence per share to raise £62.5 million before expenses ? the shares are now trading at over 450 pence ? an almost vertical climb since listing. New Brit stated in its admission document that it expected its average cost of production for 2007 to be US$262/tonne against a spot price of US$930/tonne?
MP Evans (chart)
(LSE: MPE) was already one of the strongest performers over a five year period climbing from 100 pence in 2003 to 450 pence this week. Like New Brit, MP Evans is in the cattle industry, too, with beef cattle operations in Australia. The share price is motoring, however, on the company's land bank for palm oil plantations in East Kalimantan, Sumatra and Bangka Island, Indonesia. MP Evans is in the process of selling up its assets in Malaysia to focus on Palm oil plantations in Indonesia. Resource focused investment bank Ambrian Partners have MP Evans as a top pick for 2008.
Anglo-Eastern Plant Land (chart)
(LSE: AEP) I have to say that doing even the smallest amount of research on Anlgo-Eastern Plant Land is trying. The company website is shambolic! Anyways, this company has been around for an eternity, listing on the LSE in 1985 to acquire and develop plantations in North Sumatra. Things really kick started almost a decade later when the company had a new controlling shareholder who went on a shopping spree buying up neglected palm oil estates. Anlgo-Eastern has kept to this acquisitive model, and is still announcing acquisitions to this day. As of June 2007, the Company had 36,400 hectares of plantations under operation.
Narboro Plantation (chart)
(LSE: NBP) Even more elusive than Anglo-Eastern Plant Land is Narboro Plantation! It has a small plantation in Malaysia and pays a dividend.
R.E.A. Holdings (chart)
(LSE: RE.)Also operating in East Kalimantan, and according to the Company had 16,000 hectares in production in 2007 with additional acreage being planted or cleared, and recently acquired an additional 20,000 hectares of land. Interim results in September 2007 showed strong growth in revenues and profits