Nigeria, the most populous black nation with its vast arable land has not been able to meet its local demand for crude palm oil as its production capacity lags by 1.6 million metric tons as of June 2024.
Hence, the country remains a net importer of CPO while Malaysia and Indonesia continue to dominate supply in the global commodity market.
Nigeria’s production capacity as of the end of the first half of 2024 stood at 1.4MMT, according to a report made available by CardinalStone Research, one of Nigeria’s leading investment firms.
In its equity research update titled “Oil Palm: Riding the price tailwind”, CardinalStone noted that Nigeria is failing to take advantage of the increasing price increase of CPO both in the local and internal markets.
“Nigeria remains a net importer of CPO. For context, Nigeria’s production is estimated at 1.4MMT, with demand outstripping it at 3.0MMT. Against the backdrop of the inherent domestic demand-supply gap, we believe sector players could continue to expand capacity to, at best, meet domestic demand.
“The outlook for CPO prices is tilted to the upside in H2’24, driven by constrained supplies due to stagnating global palm oil production and higher biodiesel mandates. Additionally, global demand is expected to remain robust, further supporting higher CPO prices. This combination of higher prices and improved volumes bodes well for the outlook of local players.
“The elevated global CPO price, which is up by 8.7% YTD, has dovetailed neatly for local players, with both OKOMUOIL and PRESCO reporting impressive revenue performance in H1 ’24.
“Despite the increasing competition from sunflower oil and soy oil, the outlook for CPO demand is still biased to the upside. Our view is supported by the improving demand from India, which scaled to the highest level in six months at the end of H1’24 on robust demand from refiners for the upcoming festival,” the firm noted.
“The two major producers of the product in Nigeria- Presco Plc and Okomu Oil Palm Plc appear to lack the capacity to boost production to meet the huge demand for CPO.”
Meanwhile, the two major producers of the product in Nigeria- Presco Plc and Okomu Oil Palm Plc appear to lack the capacity to boost production to meet the huge demand for CPO.
“Across our coverage universe, PRESCO appears to have more legroom to increase supply, as the potential acquisition of Ghana Oil Palm Development Company (GOPDC) will likely increase PRESCO’s plantation size to 51,760 hectares.
“For OKOMUOIL, management indicated that they have no further capacity to increase land area aside from the 1,200/HA unused land. The unused land is unlikely to be cultivated until 2026, and the first production is expected in 2029. The major volume upside is the 10,000 tons – 25,000 tons of FFB management is looking to obtain from external oil palm farmers,” the report disclosed.
On the global front, Indonesia, which accounts for about 60 percent of the world’s most widely consumed vegetable oil, is expected to have a sustained decline in the export of CPO, reflecting rising domestic demand and relatively stagnant production.
The higher domestic need for CPO in the country can mainly be attributed to the government’s implementation of the B35 programme in February 2023, which mandates fossil gasoil to be blended with 35.0% palm oil-based fuel as part of efforts to curb carbon emissions. According to the Indonesian Palm Oil Association (IPOA), the consumption of palm oil for biodiesel accounted for c.45.7 percent of total consumption, outpacing the food-induced CPO demand (44.0%) for the first time on record.
The government is considering raising the palm oil content requirement for the B35 programme to 40 percent later this year. If implemented, the Indonesian Palm Oil Association (IPOA) projects that domestic consumption will increase by 7.9 percent to 27.4 million MT in 2024, with a 9.1 percent rise in biofuel usage and a 12.0 percent drop in exports. Additionally, S&P estimates that the narrowing POGO spread—the price differential between USD crude palm oil futures and European low Sulfur gasoil futures—will further encourage biodiesel blending in the country.
Indonesia’s CPO production has been constrained over the past three years, averaging 3.2 percent growth, significantly lower than the 6.9 percent growth from 2010-2020. Data shows that 9.0 percent of the plantations are immature trees, while 91.0 percent are mature. However, 46.0 percent of the mature trees are old, reducing productivity. The USDA projects a modest 1.1 percent growth in CPO production for 2024, with yields per hectare remaining stagnant.
Malaysia, the second-largest CPO producer, also faces stagnating yields. Oil palm trees yield best between 9-18 years, after which productivity declines, necessitating replacement.
According to S&P Global, around 30.0 percent of Malaysia’s oil palm trees are over 19 years old, with replantation rates lower than the ideal 4.0-5.0 percent annually, averaging just 1.0-2.0 percent due to high costs and the need for better replanting materials, especially by smallholder farmers.
Consequently, CPO production is forecasted to dip by 0.3 percent in 2024/25, with yields per hectare expected to decline by 2.9 percent.
