Oil In The Palm Of Your Hands – Part 2

 

Having introduced the utility and advantages of palm oil in our everyday lives, let us proceed on to explore some of the bigger players in the industry!

CPO Players

As per most commodity operations, oil palm operations range from upstream all the way to downstream. The 3 entities in Part 1, Golden Agri-Resources Ltd (SGX: E5H), Indofood Agri Resources Ltd (SGX: 5JS) and Wilmar International Ltd (SGX: F34) are commonly referred to as fully integrated oil palm operations.

Fully integrated players are normally the big boys, ones that are able to control their supply chain from cultivation all the way to marketing of their very own range of consumer products.

Now let’s look into what exactly is an upstream and downstream operation.

Upstream CPO Operations

Bumitama Agri Ltd (SGX: P8Z) with operations inclusive of cultivation oil palm trees all the way to the production of Crude Palm Oil (CPO) would be considered as an upstream player.

Upstream operations starts from the cultivation of seeds in the nurseries which would develop into young palms. Next, these young palm would be transplanted to the field. This would be the stage where maintenance of the immature palms is crucial, with treatments that include regular fertilizer applications as well as chemical treatments to ensure optimal growth.

Harvesting age for oil palms would be approximately 3 years after being planted. Harvesting involves harvesters gathering the Fresh Fruit Bunches (FFB) from the trees. Oil palms are in their prime from the age of 7 to approximately the age of 18 with an economic lifespan of 25 years.

The final stage would be the milling process. Once collected, FFB have to be delivered to the mills within 24 hours to prevent the build-up of free fatty acid. The FFB would be steamed under high pressure to sterilise, loosen and soften the fruits before being stripped from their stalks and mechanically pressed to extract the oil.

And that is how we arrive at CPO!

Downstream CPO Operations

An example of a pure play downstream player would be Mewah International Inc (SGX: MV4). Mewah produces a wide range of refined and fractionated vegetable oils and fats principally from palm and lauric oil.

CPO would then be delivered to refining plants to be refined, bleached and deodorised (RBD). Subsequently, the RBD palm oil would be fractionated into stearin and olein; olein is usually sold as cooking oil.

Further processing would lead to specialty fats which are used in food applications from ice cream to chocolates. Oleochemicals would be the other path that processing of RBD palm oil would result in; which would contribute to the biodiesel production.

Value In Action

In the near future, projected population increases might bring about food related issues and although oil palms aren’t a 100% solution, they could assist in alleviating the situation.

After conducting sufficient due diligence under the right circumstances, an investment in such a commodity-linked entity could potentially aid in an investor’s task of portfolio diversification.

 

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We will only provide you with information relevant to value investing. You can unsubscribe at any time. Your contact details will be safeguarded.The information provided is for general information purposes only and is not intended to be any investment or financial advice.

All views and opinions articulated in the article were expressed in Mun Hong’s personal capacity and do not in any way represent those of his employer and other related entities. Mun Hong is a shareholder of Wilmar International Ltd.

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