JAKARTA (TheInsiderStories) – Moody’s Investors Service says that crude palm oil (CPO) prices — which have fallen 14 percent since the start of 2018 and are at their lowest levels since 2015, will present a credit challenge for rated palm oil producers if they remain at current levels.
“Continued weak CPO prices will challenge the credit metrics of the four
palm oil companies that we rate over the next 12-18 months, but the
growing demand for palm oil will support their credit profiles over the
medium to long term,” says Maisam Hasnain, a Moody’s Analyst.
“We also expect that the governments of Indonesia and Malaysia — which
together produce around 85% of CPO globally — will maintain supportive
policies towards their respective palm oil industries and this will continue to provide a valuable underpinning for ratings in the sector,” adds Hasnain.
Moody’s report identifies three key risks that could hurt the revenue and
earnings of palm oil producers over the next 12-18 months. First, on the supply side, growing levels of palm oil inventories in Malaysia and Indonesia could further weaken the selling prices of CPO.
Second, on the demand side, additional tariffs and restrictions placed
by the largest CPO-importing countries, such as India, would weaken
demand and drive sales volumes lower. And third, weaker soybean oil
prices could pressure CPO selling prices, because the two vegetable oils
are close substitutes and their prices generally move in tandem.
Nevertheless, Moody’s says that palm oil consumption will likely grow and
stay solid in countries such as Indonesia, India, and China in the medium
to long term — as these economies grow — supporting the credit quality of
Followed the current situation, Indonesia’s Ministry of Industry continues to drive palm oil downstream sector in order to escalate foreign exchange (FX) revenues to Indonesia.
The ministry noted, on an annual basis, the upstream-downstream palm oil industry contributed US$20 billion in foreign exchange. In addition, this sector also absorbs 21 million people directly or indirectly.
Recently, Indonesia contributes 48 percent of world CPO production and controls 52 percent palm oil export market. Therefore, he said, Indonesia has the opportunity to become the center of the processing industry global palm oil for food, non-food and renewable fuels.
According to the ministry, there are three downstream pathways in the domestic CPO industry that have the potential to continue developed. First, the downstream of oleofood, namely processing refinery industry to produce products between intermediate oleo food until the finished product.
Then, oleochemical complex to produce products between oleochemicals, basic oleochemicals up to in finished products such as bio-surfactant products, bio-lubricant and bio-materials.
Next, biofuel complexes to produce products between biofuels to biofuel finished products such as biodiesel, biogas, biopremium, bioavtur, and others.
Regarding the downstream biofuel, the government is currently serious about implementing the program 20 percent biodiesel (B20) fully in Indonesia, and expanding the use of the product in all vehicles motorized.
The government believes that the B20 program could increase the utilization of local raw materials and projected to reduce imports of crude oil by 4.5 million liters per year or less more equivalent to $5.5 billion.
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