(Aug. 8): As growers prepare for tougher hurdles from environmental and labor hazards, a blazing palm oil rally is sparking a frenzy of plantation acquisitions. Higher prices for tropical oil have generated a profit windfall for the industry in the last year, making now an ideal moment for cash-rich planters to buy plantation assets. It’s also a way for smaller producers to monetize their estates as they deal with mounting operational costs and labor shortages, as well as increased attention on environmental, social, and governance issues.
Palm oil, which is used in everything from cooking oil to chocolate and detergent, is currently trading more than 40% over its five-year average, owing to a global boom in farm commodities, lower-than-expected supply, and increased demand expectations. Despite the fact that vaccination efforts are increasing in various parts of the world, numerous countries are still dealing with new infections and lockdowns, further complicating issues for an industry that relies largely on human labor.
“Sellers are lowering prices to more reasonable levels because they are concerned about labor shortages, claims of forced labor, and sustainability concerns,” said Ivy Ng, head of research at CGS-CIMB in Kuala Lumpur. “Palm oil prices have been rather excellent for the last nine months, so buyers are more confident in striking a contract.”
According to her, several corporations are trying to sell plantation assets to reduce debt pressures exacerbated by the Covid-19 outbreak. “Because of the high price of palm oil, you can obtain a better deal. They need to sell the assets that are performing well, thus plantations are the ones that are being sold.”
Bloomberg reported Wednesday that Malaysian conglomerate Boustead Holdings Bhd is considering options for its publicly traded palm oil division, including a sale, citing people familiar with the situation. Boustead Plantations Bhd, with a market worth of roughly RM1.4 billion, might be sold, or its plantations could be leased or sold separately.
The possible sale follows Kuala Lumpur Kepong BhdRM1.5 .’s billion buyout attempt for IJM Plantations Bhd. last month.
More acquisitions could be announced in the coming months. Offers from growers wishing to expand may be considered by publicly traded plantation firms with high net gearing and financial commitments. The quality of estates, the age profile of trees, and sustainable certification will be scrutinized by buyers, particularly palm giants with economies of scale to cope with increasing ESG compliance expenses.
“What we can see is a trend toward consolidation by larger businesses,” said Chua Zhu Lian, an investment director at Fortress Capital Asset Management Sdn Bhd. “This could be partly driven by increased ESG regulations, which is directly connected with increasing cost of operations.”/n
