‘Palm Oil Producers’ Credit Quality Remains Strong’

RESILIENT DEMAND: Growing use of CPO as feedstock for biodiesel production will be key driver, says Moody’s

MOODY’S Investors Service says  the credit quality of palm oil producers remains strong,  supported by visibility in long-term supply, resilient demand and low, albeit rising, production costs.

“We expect production costs to rise by 10-15 per cent this year and the price of crude palm oil (CPO) to stay supported above US$700 (RM2,310) per tonne over the next two to three years,” said Moody’s associate analyst Dylan Yeo yesterday.

Yeo was speaking on the release of a new special comment entitled “Strong Fundamentals Underpin Credit Quality of Palm Oil Producers”, which he co-authored with Moody’s vice-president and senior credit officer Alan Greene.

Moody’s report states that the growing use of CPO as a feedstock for biodiesel production will be a key driver of demand growth in the next two years.

Indonesia and Malaysia launched new biodiesel mandates in the second half of last year to spur the domestic consumption of CPO.

The initiatives were taken in response to slowing Western demand, with the United States cutting biodiesel subsidies and the European Union imposing anti-dumping levies on Argentinian and Indonesian biodiesel exporters.

“We expect growth in food-based demand to be stable, backed by an estimated 2.5 per cent increase in Asia’s population over the next two years,” says Yeo.

“Such food-based demand is largely driven by population growth and changing dietary preferences as a result of rising income levels, particularly in Asia,” adds Yeo.

Moody’s report states that palm oil supply is more unpredictable in the short run due to climate changes, although the unique attributes of palm oil cultivation allows for greater visibility in long-term supply.

On the other hand, substitution between vegetable oils will limit the upside in prices.

Moody’s expects the three rated producers to maintain strong operating cash flows and to comfortably absorb higher costs within their rating parameters.

In particular, it expects Sime Darby Bhd’s (A3 stable) plantation segment, IOI Corporation Bhd’s (Baa2 stable) palm oil-related divisions and Golden Agri-Resources Ltd (Ba2 stable) to generate approximately US$550 to US$600 million, US$250 to US$300 million and US$350 to US$400 million of funds from operations, respectively, in the upcoming financial year, based on Moody’s CPO price assumption of US$700 to US$750 per tonne.

Nevertheless, Moody’s report indicates that the rated palm oil producers will need to taper cash use, either through reduced dividends or capital expenditure in order to maintain leverage.

Leverage headroom under the producers’ rating parameters has declined over the last two years due to higher gross debt and lower CPO prices.

Source: Business Times

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