Africa Palm Oil: No Game Changer for Global Production

BMI View: Africa's palm oil production growth will remain slow in the coming years, as structural weaknesses in the region and low international palm oil prices force foreign investors to reconsider their expansion plans in the continent. Consequently, although Cote d'Ivoire, Nigeria and Cameroon will record strong output growth, Africa will remain a large importer of palm oil over the coming years.

Over recent years, a number of South East Asia-based palm oil producers have announced plans to expand into Africa, with some of them having started operations. However, enthusiasm has somewhat faded since 2014. In Q115, Felda Global Ventures announced it was reconsidering its plans to invest in African plantations. Companies that have already invested in the continent have seen slow growth: after announcing its expansion into Liberia in 2010, Sime Darby has only managed to plant around 10,000 hectares (ha), out of a land bank of over 220,000ha. Palm oil companies based in Africa are also struggling: Presco, based in Nigeria, has decided to diversify its activities into cocoa and rubber in order to offset the challenging environment in the palm oil sector. Okomu Oil, another leading palm oil producer based in Nigeria, has seen its planted area stagnate over the past few years, at a low 9,700ha.

A number of factors are undermining palm oil production growth in Africa:

  • Sub-optimal growing conditions: Although the palm oil tree variety originated in West Africa, weather in the region is not as optimal for palm oil cultivation as in South East Asia, where rainfall is year-round. Countries in West Africa experience three months of dry weather a year, limiting palm oil yields.

  • Operating risks and hurdles: Policy uncertainty and a weak business environment are the main threats to investment in Africa. Law enforcement remains weak in many countries, while administrative procedures are long and dispute settlement and contract enforcement mechanisms are clearly lacking. The African countries with a suitable climate for palm oil production tend to be among the least stable in the region and are ranked among the lowest in the world for political stability. One of the most significant risks to investment in plantations in Africa is the weakness of land titles and the hazy lines between customary and legal ownership. Land concessions are a politically sensitive issue and may lead to significant financial and time hurdles. Overall, operational risks are significantly more elevated in these African countries than in Indonesia and Malaysia, the two giant palm oil producers. In 2015, for example, labour actions at plantations owned by Sime Darby and Golden Veroleum in Liberia hampered production. The Ebola outbreak in 2014 also significantly slowed palm oil expansion plans in some African countries.

  • Lower productivity and elevated costs of production: Palm oil production in Africa is dominated by smallholders, making up 70-80% of total production. Their productivity is hampered by outdated farming techniques and low access to inputs, including seeds, fertilisers and machinery. As a result, fresh fruit bunch (FFB) yields and oil extraction rates are lower in Africa than in Asia. Other obstacles include a lack of government support and the high costs of infrastructure. All these result in higher production costs ( see chart above).

  • Low international palm oil prices: Palm oil prices have been subdued since 2012, driven by lacklustre demand from India, China and the EU, undermining confidence in the sector. The global market is currently well supplied, limiting the attractiveness of new investments in plantations in frontier markets.

Production Is More Efficient In Asia
Sime Darby - Crude Palm Oil Cost Of Production (MYR/tonne)
Note: Cost of production for plantation and milling activities. Sime Darby estimates CPO production costs in Liberia at around 10% to 15% higher than in Malaysia. Source: Sime Darby

Africa Palm Oil: No Game Changer for Global Production

BMI View: Africa's palm oil production growth will remain slow in the coming years, as structural weaknesses in the region and low international palm oil prices force foreign investors to reconsider their expansion plans in the continent. Consequently, although Cote d'Ivoire, Nigeria and Cameroon will record strong output growth, Africa will remain a large importer of palm oil over the coming years.

Over recent years, a number of South East Asia-based palm oil producers have announced plans to expand into Africa, with some of them having started operations. However, enthusiasm has somewhat faded since 2014. In Q115, Felda Global Ventures announced it was reconsidering its plans to invest in African plantations. Companies that have already invested in the continent have seen slow growth: after announcing its expansion into Liberia in 2010, Sime Darby has only managed to plant around 10,000 hectares (ha), out of a land bank of over 220,000ha. Palm oil companies based in Africa are also struggling: Presco, based in Nigeria, has decided to diversify its activities into cocoa and rubber in order to offset the challenging environment in the palm oil sector. Okomu Oil, another leading palm oil producer based in Nigeria, has seen its planted area stagnate over the past few years, at a low 9,700ha.

Production Is More Efficient In Asia
Sime Darby - Crude Palm Oil Cost Of Production (MYR/tonne)
Note: Cost of production for plantation and milling activities. Sime Darby estimates CPO production costs in Liberia at around 10% to 15% higher than in Malaysia. Source: Sime Darby

A number of factors are undermining palm oil production growth in Africa:

  • Sub-optimal growing conditions: Although the palm oil tree variety originated in West Africa, weather in the region is not as optimal for palm oil cultivation as in South East Asia, where rainfall is year-round. Countries in West Africa experience three months of dry weather a year, limiting palm oil yields.

  • Operating risks and hurdles: Policy uncertainty and a weak business environment are the main threats to investment in Africa. Law enforcement remains weak in many countries, while administrative procedures are long and dispute settlement and contract enforcement mechanisms are clearly lacking. The African countries with a suitable climate for palm oil production tend to be among the least stable in the region and are ranked among the lowest in the world for political stability. One of the most significant risks to investment in plantations in Africa is the weakness of land titles and the hazy lines between customary and legal ownership. Land concessions are a politically sensitive issue and may lead to significant financial and time hurdles. Overall, operational risks are significantly more elevated in these African countries than in Indonesia and Malaysia, the two giant palm oil producers. In 2015, for example, labour actions at plantations owned by Sime Darby and Golden Veroleum in Liberia hampered production. The Ebola outbreak in 2014 also significantly slowed palm oil expansion plans in some African countries.

  • Lower productivity and elevated costs of production: Palm oil production in Africa is dominated by smallholders, making up 70-80% of total production. Their productivity is hampered by outdated farming techniques and low access to inputs, including seeds, fertilisers and machinery. As a result, fresh fruit bunch (FFB) yields and oil extraction rates are lower in Africa than in Asia. Other obstacles include a lack of government support and the high costs of infrastructure. All these result in higher production costs ( see chart above).

  • Low international palm oil prices: Palm oil prices have been subdued since 2012, driven by lacklustre demand from India, China and the EU, undermining confidence in the sector. The global market is currently well supplied, limiting the attractiveness of new investments in plantations in frontier markets.

Production Doubling In Some Countries
Select Countries - Palm Oil Production ('000 tonnes)
Note s : In comparison, we forecast Indonesia's production in 2018/19 to be at 39.9mn tonnes and Malaysia's at 21.8mn tonnes. Full names include Cote d'Ivoire, Guatemala, Cameroon, Philippines, and Venezuela; Source: USDA, MPOB, FAO, BMI

Stable Global Market Share

Because of the constraints listed above, Africa's palm oil production expansion will remain slow in the coming years. We forecast the global share of production to remain broadly the same over the coming years, with Indonesia and Malaysia maintaining a market share of over 85% out to 2019. Some African countries will record stronger growth than their South East Asian counterparts (namely Cote d'Ivoire, Nigeria and Cameroon) as production comes from a low base, but the continent's share of global output will remain minimal over the medium term.

Cote d'Ivoire Racing Ahead In Africa
Select Countries - Palm Oil Production Growth, 2015-2019 (average %)
Source: BMI

The increase in Africa's palm oil production will help the region's deficit narrow. But Africa will remain a large importer of palm oil over the coming years, as consumption growth will continue to outpace production expansion. Cote d'Ivoire will remain a net exporter of palm oil and will supply other countries in the region (mainly Nigeria, Senegal and Mali). Nigeria, South Africa, Tanzania and Ghana will remain the largest importers.

BMI Palm Oil Forecasts (2013-2019)
2013 2014 2015f 2016f 2017f 2018f 2019f
f = BMI forecast. Source: National sources, BMI
Cameroon Palm oil production, '000 tonnes 280.0 290.0 270.0 286.2 303.4 321.6 340.9
Cameroon Palm oil production, % y-o-y -17.6 3.6 -6.9 6.0 6.0 6.0 6.0
Cameroon Palm oil production balance, '000 tonnes -70.0 -67.0 -115.6 -132.9 -152.2 -173.6 -197.4
Nigeria Palm oil production, '000 tonnes 895.0 930.0 950.0 978.5 1,017.6 1,068.5 1,111.3
Nigeria Palm oil production, % y-o-y 3.5 3.9 2.2 3.0 4.0 5.0 4.0
Cote dIvoire Palm oil production, '000 tonnes 390.0 405.6 425.9 451.4 483.0 521.7 558.2
Cote dIvoire Palm oil production, % y-o-y -2.5 4.0 5.0 6.0 7.0 8.0 7.0
Cote dIvoire Palm oil production balance, '000 tonnes 200.0 211.8 229.2 248.4 273.3 305.3 335.1
Ghana Palm oil production, '000 tonnes 130.0 134.0 136.0 138.7 142.9 148.6 153.1
Ghana Palm oil production, % y-o-y 2.4 3.1 1.5 2.0 3.0 4.0 3.0
Ghana Palm oil production balance, '000 tonnes -200.0 -203.3 -213.1 -225.7 -239.8 -253.2 -268.8
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