Golden Agri rides on demand spike, stronger prices for palm oil

Singapore

PALM oil plantation owner Golden Agri-Resources is expecting crude palm oil (CPO) prices to remain strong for the rest of the year, as dry weather conditions keep supply tight and the post-pandemic recovery in economic activity supports demand.

Richard Fung, director of investor relations at Golden Agri, told The Business Times that with the easing of lockdowns globally, the demand for palm oil has "quickly recovered" as the commodity is used as an essential ingredient in food staples.

However, the effect of this recovery has been uneven across sectors, he added. While demand from the consumer and energy sectors has been firm, demand for palm oil-based products catering to the hotels, restaurants, cafes (HORECA) space has not fully recovered.

"Demand is expected to remain strong amidst the progressing vaccination globally," said Mr Fung. "Other than high demand for palm oil for food purposes, biodiesel has also seen strong demand in recent years, especially in Indonesia."

Year to date, palm oil futures are up 9.9 per cent, recovering from their lows in February. However, the contract is currently down some 20.6 per cent on a month-on-month basis.

Despite the recent price fluctuations, Mr Fung explained that the demand-supply dynamics of the palm oil industry could bode well for the company.

As vaccinations are rolled out across the world, demand is expected to increase further as various restrictions are eased. This could also boost the demand for palm oil across multiple sectors.

On the supply side, weather conditions are a major factor for palm oil players such as Golden Agri as they affect fresh fruit bunch yields. In 2019, the company suffered a decline in yields due to a water deficit, but production began to recover at the end of 2020 and in Q1 2021.

Mr Fung said oilseeds production has been distorted in H1 2021 by extremely dry weather in South America and other parts of the world, which has in turn resulted in a tightness in global vegetable oil supply.

Golden Agri's fruit yield for Q1 2021 was 5.3 tonnes per hectare, a 22 per cent year-on-year increase, due to favourable weather conditions.

He expects fruit production to be at a "normal level" this year, and full-year production to come in 10 per cent higher than last year.

Golden Agri is not just looking to tap on the industry's uplift, though. It is also working to increase its efficiency and lower its costs of production.

Golden Agri's plantations in Indonesia, which span some 536,000 hectares, have an average tree age of about 17 years. The company is also looking at replanting old estates with newer-generation crops and higher- yielding planting materials, which could increase long-term yields and production.

The company is also using technology to increase productivity and cost efficiencies, as well as to enhance profit margins. But these will only be implemented progressively.

Mr Fung said mechanisation of certain processes, for instance, could require the necessary infrastructure in the plantations, which can only be done after replanting.

"Our transformation team focuses on combining technology, digitalisation, and artificial intelligence with operational excellence to create new ways of working throughout our operational value chain," he added.

Golden Agri's financial results for Q1 FY2021 indicated that the group had turned a corner. The group swung back into the black with a net profit of US$41 million, versus a net loss of US$95 million in the same quarter last year.

Revenue for the period rose 24 per cent year on year (yoy) to US$2.05 billion from US$1.66 billion. This was due to a 57 per cent y-o-y increase in the average international CPO (FOB Belawan) price to US$1,057 per tonne.

Mr Fung acknowledges that if the pandemic stretches on, Golden Agri could be in for a rough time. But he remains optimistic about the company's ability to capitalise on market opportunities as its integrated business model will allow it to "quickly adapt to challenges under the 'new normal' conditions".

He said: "With vaccination progressing globally, there is optimism that global economies will recover and further increase palm oil's demand.

"Despite the resilient demand for palm oil, we need to stay prudent and alert, to anticipate any uncertainties and unforeseen challenges from the lingering Covid-19 pandemic."

Shares of Golden Agri ended Monday at 23.5 Singapore cents, down 4.1 per cent or one cent.

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