Palm oil makers’ mid-year performance may remain unimpressive as headwinds linger

Palm oil makers’ mid-year performance may remain unimpressive as headwinds linger

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There is the possibility that the factors that crippled the revenue of Nigerian palm oil producers in the first quarter of 2019 could resurface in the second quarter.
The revenue of two listed firms in the sector, Okomu Oil Palm and Presco plc, declined by 42.4 percent and 16.7 percent, respectively, in the first quarter (Q1) of 2019, BusinessBay analysis of the firms’ financial results for the period shows.

Analysts attribute the decline in revenue of the two firms to lower crude palm oil prices in the international market. This is as favourable weather conditions in the world’s largest crude palm oil producing countries, such as Malaysia and Indonesia, led to increased production and yield which, in turn, had made importation of the raw product cheap.

“The problems that they [local producers] faced in the first quarter are not yet over yet as there are still favourable weather conditions in those countries,” said Ibrahim Tajudeen, head of research, Chapel Hill Denham.
“The tariff to import the crude oil palm is expensive so Nigerian consumers of the oil palm prefer to smuggle from other neighbouring countries because it is cheaper there,” Tajudeen said.
Palm oil is derived from the fruit of the oil palm tree, which is grown in tropical regions of Asia and Africa.

The majority of global palm oil production takes place at large plantations in Malaysia and Indonesia. Producers in these countries grow very large oil palm crops, which thrive in the tropical conditions found in that part of the world.
According to data sourced from Bloomberg, oil palm prices trended southwards to $2,040 on June 18, 2019 from $2,368 on August 15, 2018.

Oil palm prices in Nigeria are believed to be relatively higher than international prices primarily due to import restriction on the commodity following the introduction of the Central Bank of Nigeria’s list of 42 foreign exchange excluded items in 2015.
An import charge of 35 percent is levied on the importation of oil palm.
Although Nigeria is one of the top producers of oil palm, production is not enough to meet the demand of its rising population. The deficit is catered to by importation of oil palm from other countries.

The demand is driven by the increasing household consumption of technical palm oil because of taste and increased demand for special palm oil that is processed into refined, bleached and deodorised for industrial purposes.
“I expect their revenues to further decline. The issues from smuggling and lower crude oil prices caused by supply glut are still befalling them,” Ayorinde Akinloye, analyst at CSL Stockbrokers, said.

Despite increasing oil palm demand, production growth is challenged by several factors, which are insufficient research and development, multiplicity of smallholder farms, high working capital requirements and inefficient farming and milling technologies.
Recall that President Muhammadu Buhari last month directed the CBN to blacklist any firm, its owner and top management caught smuggling or dumping any of the restricted 43 items into Nigeria.

“We want to make everybody understand how serious we are and also to emphasise that what we are doing to stop the importation of oil palm into Nigeria is a presidential directive that must be adhered to,” Godwin Emefiele, CBN governor, said in a meeting with oil palm producers.
“Doing this also means that while we are stopping the importation of palm oil, we must do all possible to ensure that palm oil production is aggressively increased in Nigeria,” Emefiele said.



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