Commodities

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Palm oil, that ubiquitous liquid found in everything from shampoo and soap to lipstick, noodles and bread, is hoping for bad weather. But a supply squeeze alone won't be enough to deliver it from the twin problems of debt and deflation. 

Following a downgrade by Standard & Poor's last week, Moody's on Tuesday cut its rating on Malaysian planter Sime Darby by one notch, and warned of further action if the company fails to deleverage. Sime Darby, which is still struggling to digest its 2014 debt-financed acquisition of a palm-oil cultivator in Papua New Guinea, saw operating income from plantations dwindle to $34 million last quarter, a fraction of what the business used to make before the global commodities rout.

Palm Oil's Everywhere But Earnings
Malaysian conglomerate Sime Darby's operating profit from plantations has plunged
Source: Bloomberg

Sime Darby is hardly alone. Palm-oil profits have collapsed amid heightened global scrutiny of the industry's environmental impact. Indonesia's Astra Agro Lestari now earns a return on capital of a little more than 5 percent, compared with almost 30 percent in 2012. Malaysian planter and refiner IOI Corp. has net debt that's more than three times Ebitda, according to data compiled by Bloomberg. A significant amount of its borrowings are denominated in U.S. dollars and S&P says liabilities will rise further this year as IOI acquires capacity in Europe to turn palm oil into ingredients used in food, cosmetics and personal care.

Under The Weather
El Nino expectations are pushing depressed palm oil prices higher
Source: Bloomberg

A nascent rally in palm-oil prices, driven largely by expectations of El Nino-type harvest disruptions, has made some analysts optimistic. The glut of palm oil, whose production has doubled since 2000 to give it a share of almost 40 percent among major edible oils, is easing. Global inventories fell about 30 percent in the fourth quarter to a three-year low, while stockpiles of soybean oil, a close substitute, rose, U.S. Department of Agriculture data show: 

Leaving the Warehouse
Global inventories of palm oil have been heading sharply lower
Source: U.S. Department of Agriculture, Bloomberg data

But investors shouldn't get their hopes up.

For one, growing soybean output in South America could put renewed pressure on palm-oil prices, according to research firm Oil World, and the industry's fortunes are still hostage to weak demand in some industries. Even in a fast-growing economy like India, which consumes roughly one sixth of the world's palm oil, soap prices aren't going up despite an increase in palm-oil costs for companies like Hindustan Unilever and Godrej Consumer Products. Shampoo prices, meanwhile, are down 16 to 31 percent from a year earlier, while McVitie's digestives, which use palm oil to make them more dunkable, are 25 percent cheaper, according to brokerage Religare.

Bad weather can at best be a short-term palliative for palm oil, but believing it can also be a cure for lackluster demand, price deflation and elevated debt is wishful thinking.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net