Tuesday, November 10, 2015 12:14 PM / FBN Capital Research
Today we turn our attention to the palm oil sector. Nigeria was once a world leader in palm and other vegetable oil production. Nigeria and Ivory Coast are the leading producers of palm oil in Africa. However, Africa contributes less than 5% to global production.
Based on industry data, Nigeria imports 500,000 metric tonne (mt) of palm oil annually, valued at US$300m, while domestic demand is estimated at 1.2million mt (mmt).
The CBN’s recent ban on accessing fx from the official window for specific import items (including palm oil products) could serve as a catalyst in boosting domestic production.
Last year, Malaysia and Indonesia, the two countries that account for around 85% of the world’s total production of palm oil, increased their output by 8% and 4% to reach 30.8mmt and 19.9mmt respectively.
In an attempt to correct the demise that the industry has seen in Nigeria, Adesina Akinwunmi, the immediate past minister of agriculture, encouraged import substitution. One of the measures introduced was an import duty of 35% on palm oil to encourage domestic production.
According to the Initiative for Public Policy Analysis (IPPA), up to 90% of palm oil produced ends up in food products, while the remaining 10% is used industrially. Of the two major Nigerian palm oil companies, Presco supplies the industrial segment. We do not expect the domestic industry’s split in terms of usage to change materially in the near to medium term.
Based on data from the CBN’s annual Statistical Bulletin, oil palm represented just 1% of crop production GDP in 2014, compared with maize and cassava which accounted for 9% and 36% respectively. Crop production accounted for 90% of agricultural GDP in the same period.
To stimulate growth in the real sector, through its Commercial Agriculture Credit Scheme (CACS), the CBN has placed special focus on seven commodities (rice, wheat, sugar, fish, dairy, palm oil and cotton). Last month, N75.2bn was released under the scheme for these commodities.
Over the January to September 2015 period, Okomu Oil and Presco reported sales growth of 12.3% and 16.2% respectively, and PBT growth of 23% and 60.5% respectively. It would appear that the impact of the restriction of access to fx on importers has not yet impacted (positively) on these two domestic producers’ results meaningfully. If imports eventually fall off sharply (and smuggling is contained), prices should trend up and ultimately boost Okomu and Presco’s earnings.