Investors can't ignore controversial palm oil

Palm oil is a controversial subject for investors as the prospect of decent returns from this fast-growing area is offset by environmental concerns.
The soft commodity has found itself at the heart of a raging controversy surrounding everything from the destruction of rainforests to the possible extinction of orangutans, but with demand set to soar its lure shows no signs of dwindling.
A staggering one-in-10 products on the supermarket shelf now contain palm oil - a fact too attractive for investors to ignore.


A host of recent flotations has made this market easier than ever to access.
Equatorial Palm Oil (PAL) became the latest company to join the bright lights of London listings last week after raising £6.5 million for its palm oil operations in Liberia, West Africa.


The newly AIM-listed company follows hot on the heels of Asian Plantations (PALM), which joined AIM in November, and New Britain Palm Oil (NBPO) which floated in December 2007.


It now sits among the ranks of REA Holdings, MP Evans (MPE), Anglo-Eastern Plantations (AEP) and Narborough Plantations (NBP) which have notched up average gains of over 110% in share price over the past five years.


However, 7,000 miles away the wild-life rich forests of South East Asia, most notably Indonesia, are being mowed down to make way for palm-oil plantations.
UK secretary of state for environment, food and rural affairs, Hilary Benn, estimated that between 1990 and 2005, Indonesia lost 28 million hectares of forest and in under 50 years the country has gone from being 82% forest to just 49%.


Today, 30sqm are felled on a daily basis as the country scrambles to provide the world with the cheapest cooking oil available.
Greenpeace has slammed production methods for releasing "vast amount of greenhouse gases into the atmosphere, accelerating climate change". While Indonesia's peatlands represent just 0.1% of the Earth's land mass, they contribute a substantial 4% of global emissions. Yet the controversy fails to deter investors.

Alex Martinos, analyst at Mirabaud Securities, commented: "Global palm oil consumption has surged in recent decades, driven both by growing demand for cooking oils from Asian economies, and also by increased usage in the west, where it is seen as a healthier alternative to hydrogenated fats in food products. In addition, palm oil biodiesel represents a major new potential growth area."


One of the better known UK-listed companies, New Britain Palm Oil, has seen its shares rocket since the start of 2009 and have already increased by over 20% since the start of this year. Testament to its growing presence, the FTSE 250 company recently snapped up an 80% stake in CTP, a Papau New Guinea plantations group, for $175 million - crucially adding over 160,000 metric tonnes of new production in 2011.


Tom Plinston, analyst at Collins Stewart, said: "We raise our 2010 revenue forecasts from $320 million to $409 million. We have raised our group target price to 611p implying 25% upside with the new asset adding 119p to the group, whilst the reduced planting programme lowers the long term value of existing assets."
In April the company will unveil a new refinery in Liverpool, England, which has already struck a supply deal with United Biscuits.


From biscuits to bread, it is estimated that a growing number of goods are reliant upon the oil.
The oil is remarkably efficient - producing an annual yield of 3.5 to four tonnes a hectare compared with just an average 0.5 tonnes for rapseed or soy. For businesses, its attraction comes in the form of a much more purse-friendly price tag than its aforementioned counterparts.


John Beaumont, analyst at Matrix Group, said: "Palm oil proves very efficient compared to other oil crops. In a world where we are still trying to feed umpteen people, it makes much more sense to tap into an efficient source.


"The other straightforward attraction for businesses is that growing demand will call for increasing prices. There are only a set number of growers globally which makes this business very profitable."


GreenPeace now estimates that demand for palm oil will double by 2020 and triple by 2050.


The question of sustainability
Beaumont believes the success of companies will rely not upon their abandoning of palm oil, but on their ability to produce it sustainably.


Just recently, Anglo-Dutch group Unilever (ULVR) bowed out of acquiring palm oil from Indonesian supplier Duta Palma amid growing fears of rainforest destruction. The decision comes just months after the FTSE 100 group suspended a $33 million supply contract with producer PT Smart.


The consumer goods giant currently buys 1.4 million tonnes of palm oil annually - 3% of the total global supply of palm oil. However, a spokesman confirmed the group's committment to buying 100% certified sustainable palm oil by 2015.
This is where the likes of New Britain Palm Oil have done their homework.


"New Britain Palm Oil has done so well because all of its fields are sustainable. With the new refinery about to open, it will be able to trace its oil all the way along the supply chain. This makes an excellent selling point and appeals to investors both from a financial and environmental sense," said Beaumont.


Recognising the growing concerns, an organisation by the name of Roundtable on Sustainable Palm Oil was launched in 2004 in an effort to stave off unethical practices and cites the likes the Cadbury and Tesco as members.


However, Greenpeace has slammed the organisation for failing to be far-reaching.
"As it currently stands, even though member companies are paying lip-service to forest and peatland protection, the reality is very different. The existing standards developed by the RSPO will not prevent forest and peatland destruction, and a number of RSPO members are taking no steps to avoid the worst practices of the palm oil industry.


Greenpeace has called for a moratorium on converting forest and peatland into oil palm plantations to allow long-term solutions to be developed and is urging supermarkets and food companies to cease trading with palm oil suppliers involved in environmental destruction.


African appeal


But while South East Asia comes under attack amid fears of growing controversy and finite supply, West Africa is shaping up to be an attractive alternative.
The plant originated in tropical West Africa but political instability and more lucrative base metal opportunities have hindered the industry from fulfilling its full potential.


Martinos said: "As Indonesia and Malaysia run short of new land suitable for palm oil plantations, major producers are likely to look for other areas suitable for development. One such region is West Africa - originally the home of the oil palm. Equatorial Palm Oil has established a huge land bank for development in Liberia, and has raised funds to re-activate existing plantations and begin expansion.


"Equatorial Palm Oil is still at a very early stage, but it has established a strong land position in an exciting new region for palm oil development, and offers very significant long-term growth potential."
The company's chairman Michael Frayne agrees that interest in the region is on the up.


"The supply/demand dynamics dictate that palm oil is a major soft commodity which will play a huge role. It is the most efficient vegetable oil in the world and there is great demand for it as a food resource across West Africa. A lot of companies previously focused in South East Asia are now vying for a spot in the region, particularly Liberia."


While Greenpeace fights to halt the growth of palm oil development, it would seem businesses and investors alike have a very different idea.

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