There is a frenzy in planting deals following palm oil rally, ESG worries
A meteoric palm oil rally fuels a flurry of plantation deals as growers brace for greater challenges related to environmental and labor risks.
Higher prices for tropical oil over the past year have created a windfall of profits for the industry, making the time for cash-rich planters to grab plantation assets. It is also an opportunity to monetize the estates for small producers struggling with rising operating costs and labor shortages, as well as an in-depth examination of environmental, social and governance issues.
Palm oil, used in everything from cooking oil to chocolate and detergents, is trading more than 40% above its five-year average amid a global recovery in agricultural products, with production below expectations and optimism about demand. Yet, as vaccination efforts intensify in parts of the world, several countries are battling new infections and blockages, making matters worse for an industry so heavily reliant on manual labor.
“Vendors are lowering prices to more reasonable levels because they see the challenges of labor shortages, allegations of forced labor and sustainability issues,” said Ivy Ng, research manager at CGS -CIMB in Kuala Lumpur. “Buyers are more confident to close a deal as palm oil prices have been quite good over the past nine months.”
Some companies are also looking to sell plantation assets to ease the debt burden made worse by the Covid-19 pandemic, she said. “The high price of palm oil means getting better value. They have to sell those assets that are doing relatively well, and therefore the plantations are the ones that are traded. “
Malaysian conglomerate Boustead Holdings Bhd. is considering options for its listed palm oil subsidiary, including a sale, Bloomberg reported on Wednesday, citing people with knowledge of the matter. Boustead Plantations Bhd., Which has a market value of around 1.4 billion ringgit ($ 336 million), could be sold, or have its plantations leased to third parties or sold separately.
This potential sale follows the takeover bid for Kuala Lumpur Kepong Bhd. on IJM Plantations Bhd. for 1.5 billion ringgit last month.
Other transactions could materialize in the coming months. Listed plantation companies with high net debt and financial commitments may consider offers from producers seeking to expand. Buyers, especially palm giants with economies of scale to deal with higher ESG compliance costs, will carefully consider the quality of the estates, the age profile of the trees and the sustainability certification.
Image courtesy of Joshua Paul / Bloomberg