MALAYSIA - The palm oil industry is likely to see some consolidation, driven by the pressures of shrinking prices and profit margins, and rising production costs, said Rabobank.
The price of crude palm oil fell about 35 per cent between January and October last year, from RM3,223 per tonne to RM2,115 per tonne - its lowest levels since the global financial crisis.
While the price has rebounded, it remains subdued - it was RM2,368.5 (S$943) as of Monday.
Rabobank analyst Pawan Kumar attributed the low price to expectations of a strong production cycle and demand for palm oil lagging behind output. Further declines in crude palm oil prices could put pressure on profit margins, particularly among smaller players, and drive consolidation, Mr Kumar said in a Rabobank report last week.
Larger firms, which enjoy better economies of scale in areas such as better sourcing arrangements for fertiliser and a higher degree of mechanisation, may target their less efficient peers, he added.
Compounding the pressure on the smaller players are rising production costs - including fertiliser and labour costs.
Production costs in Indonesia and Malaysia - the world's largest producers of palm oil - have increased 6 per cent and 9 per cent per year respectively between 2008 and last year.
Fertiliser and labour costs account for more than half of the total costs in crude palm oil production, said Mr Kumar. The increased share of fertiliser costs - the largest cost component - is not only due to rising fertiliser prices, but also higher usage.
For every 10 per cent increase in fertiliser costs, the costs of crude palm oil production rise by more than 3 per cent, said the Rabobank report.