Published December 3, 2008

Takeovers seen as palm oil prices slump

Large firms are well placed to buy land from what could be forced sales

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(KUALA LUMPUR) A slump in palm oil prices is giving Asia's cash-rich planters a chance to take over smaller firms that mushroomed in recent years as commodities boomed, but are now struggling to survive.

Downtrend: Palm oil prices have fallen by two-thirds after hitting a March peak of RM4,486 as commodities tumbled on fears of a global recession and demand waned

Malaysia's Sime Darby, the world's biggest palm oil company by planted area, last week posted a 44 per cent rise in quarterly earnings, proof that the boom has filled the sector's coffers.

With a recovery in prices nowhere in sight, now may be the time to look for bargains, analysts said.

Well-established firms such as Singapore's Wilmar International and Jakarta-listed Astra-Agro Lestari are in a strong position to buy land from what could be forced sales by newer plantations.

'These estates are takeover targets . . . because when you first start out in this business, money only goes in one way and that is out,' said Martin Bek- Nielson, executive director of mid-sized United Plantations.

'Takeover possibilities could appear if (crude) palm oil prices continue to stay at RM1,400 (S$587) to RM1,500 for the next half year,' he said.

Sime Darby's CEO has said that the global market turmoil provided a 'once in a lifetime' opportunity to acquire undervalued assets. The company has a cash pile of about US$1.5 billion.

Previous palm oil price slumps saw little industry consolidation as there were fewer new estates and many more plantations were better established with mature oil palms.

Palm oil prices have fallen by two-thirds after hitting a March peak of RM4,486 as commodities tumbled on fears of a global recession and demand waned.

Prices are now near break-even for less efficient plantations.

Demand was earlier boosted by China's surging economy, record high crude oil prices, which gave a boost to biofuels, and as funds poured money into commodities.

Palm oil, a reddish- brown oil, is used in a variety of products from chocolate to make-up and biofuels.

Sime Darby wants to almost double its landbank to one million ha by 2011 from a current 522,363 ha and will likely do that through buying already planted land.

The two-year boom in prices saw new plantings in Indonesia and Malaysia rise by 1.1 million ha to 11.4 million ha, according to analysts and Reuters calculations.

Sime Darby has forecast palm oil prices to tick higher to RM1,800 per tonne in 2009.

Breakeven for smaller planters is around RM1,500 a tonne, according to industry estimates.

'If the current downtrend protracts for a longer period, companies with high production costs will be the first to become distressed,' said James Ratnam, plantation analyst at TA Securities in Kuala Lumpur.

The commodity is nine months in its downturn. Past troughs in the cycle have averaged 17 months, so some light at the end of the tunnel may enable companies to hold on, analysts said.

Goldman Sachs said that based on the past two cycles, when stock levels start falling, prices could soon bottom out.

Palm oil reserves stood at a record 2.09 million tonnes in October, according to data from the Malaysian Palm Oil Board.

Although palm prices are low, the cost of planted assets is still 50 per cent higher than at the start of the boom.

It costs RM40,000 per ha to buy land in Malaysia's Sabah and Sarawak states on Borneo island - the last frontier for the country's palm oil push, plantation officials said.

Kalimantan, the Indonesian side of Borneo, could be much cheaper and more acquisitions are likely to happen there.

'It's apparent that cash strapped (companies) will be quiet, but the big boys that are cash rich will have a lot to say and do,' said Velayuthan Tan, chief executive of IJM Plantations, which bought 32,000 ha of greenfield land in Kalimantan.

While Wilmar and IOI Corp have indicated that they will be cautious buyers, they also have large exposures to the downstream refining sector and have relatively high debt-to-equity ratios.

IOI shares have lost 56 per cent this year, while Sime Darby is down 45 per cent compared with a 33 per cent drop on the broader Malaysian stock index. -- Reuters