Malaysia's political shock to the CPO price?

Khor Reports: Our comment on recent steep CPO price drop. For the first time since the Global Financial Crisis, CPO price has fallen below Brent.

We are hearing from the market various reasons. 1) Demand has been relatively stable (China buying stabilizing, high growth markets reducing buying at high prices etc) vs rising seasonal supply. 2) Biodiesel mandate in the EU to be cut in the future. 3) Technical charts have "broken". 4) Malaysia's one year policy paralysis vs Indonesia's change in export duty structure has resulted in slower sales from Malaysia, building up stocks. Perhaps most interesting is this one, 5) The deleterious and unintended impact of Malaysia's policy to add another 2 million tonnes of CPO export duty free quota in 2012. Market participants commonly say that they reckon that 1/2 of the usual 3-3.5 million tonne annual quota, has gone to non-market players. There is suspicion that the additional quota for this year may have been given mostly if not entirely to non-market players and/or "market underperformers". After all, this is election or pre-election year in Malaysia, where political largesse is directed toward likely supporters i.e. via special contracts, licenses or quotas. In Malaysian parlance, quota holders are now often dubbed as "AP holders" (likening them to the import licence multi-millionaires created in the its tightly controlled automobile market). However, instead of helping clear CPO stocks in Malaysia and boost prices, the added 2 million tonnes quota may have seriously backfired. The market reckons that the quota recipients, hoping to make a fee by flogging the quota certificates, may have found few if no takers among the big palm oil companies and traders (who are capable of moving the product). The regular players would see no need to pay a special premium in a big and liquid market (after all, lower prices will also clear the market and the quotas will expire). Thus, the special Malaysia CPO quota players may have been left with quotas they are unable to "palm off." Furthermore, they are also incapable of effectively moving the CPO into the world market. Worse, some may have taken trading positions, and with the steep drop in CPO price, may now also face big trading losses. Thus, has there been an added crunch in the palm oil market, as a result of Malaysia's shock attempt to generate special quotas for an unknown group of recipients (there is talk that they are are under "Official Secrets Act" non-disclosure protection). A lesson in how politics in the second largest palm oil producing country might create a small shock to the commodity price? An interesting theory.

AP = "approved permit"

Updated 5.30pm: Note the mention of surrender of the "approved permits" or APs on CPO: "The minister (Bernard Dompok) also noted that for this move to be effective, there has to be curbing exports of duty-free CPO as well. "Out of the quota of five million tonnes of duty free CPO we've allowed to be exported, only half has been utilised. I want the companies which have not used up their quotas to surrender back the approved permits," he added... http://www.mpoc.org.my/Malaysia_to_Slash_CPO_Export_Tax.aspx

Felda Global listing: over RM600 million in profits pocketed so far?

Felda Global listing was "designed to succeed," over RM600 million in profits pocketed so far? Khor Reports.

Thank you for your overwhelming interest in our report on "Felda Global - a socio-political perspective" issued back in May. We were interviewed by Al Jazeera, Bloomberg and Reuters on the mega-listing, quoted in the Financial Times, The Edge Malaysia and also cited in some international reports.

I've had some queries and I thought more of you may be wondering what's been happening with share trading in Felda Global so far. It's about a month and a half since the listing on 28 June. I've compiled some statistics on price and volumes traded to give a picture of what is the value of shares traded and how much profits may have been made in this so-called "designed to succeed" listing; it was the 2nd largest in the world after Facebook.

Data briefing and analysis paper issued by Khor Reports on 16 August 2012. Please contact us for a copy.

100tC/ha ceiling?

Khor Reports: Palm oil rumour-mill reckons that a 100tC/ha carbon stocks ceiling is now being considered by GAR-TFT for new land development by oil palm plantations.

This is up from the initial ceiling of 35tC/ha mooted in the Nestle-GAR-TFT deal, where GAR or Golden-Agri-Resources, part of the Sinar Mas Group, also agreed to no planting on any peat land.

Cambodia local elections impacted by land discontent?

Cambodian PM's party triumphs in election test run,PHNOM PENH | Tue Jun 5, 2012 5:37am EDT:"Official results from Sunday's elections for the chiefs of areas known as communes are not expected for several weeks but the major parties were in agreement that Hun Sen's Cambodian People's Party (CPP) had swept the polls, as it has in all national ballots in the past decade. The CPP claimed 72 percent of the seats in what it sees as a test of support ahead of the 2013 election. General elections take place every five years....The latest polls did throw up some signs of discontent, with the CPP's notable loss of seats in areas that have seen long-running land disputes and forced evictions from land leased to foreign companies. The government suspended new land concessions to foreign firms in May...." http://www.reuters.com/article/2012/06/05/us-cambodia-elections-idUSBRE8540E420120605

Khor Reports comment: In the 2007 commune elections, the Cambodian People's Party won 1,592 commune chief (97%) out of 1,633 communes. The claimed victory of 72% of seats last month suggests a 17%-age point reduction in the number of seats. Just before the elections, new economic land concessions to foreigners were frozen. In the previous two years, there had been a surge in award of such concessions. Land disputes seem to be rife and these have apparently impacted on the ruling party's electoral results, although it still holds a very commanding position. When we started to research Cambodia agricultural concessions several years ago, there was little sign of NGO activity. Now, there are several active on land dispute matters. One is focused on sugar projects, lobbying foreign-buyers to boycott Cambodian sugar because of land conflicts.

50% utilization plus excess soybean demand in China?

Khor Reports notes and comments:  

In a report on earnings risks at Wilmar’s “oilseeds & grains” business, by brokerage Kim Eng, dated 5 July, “Times not soy good anymore”, target price: 3.25 on 1.2x p/b some interesting data points: 

a) Soybean crushing utilization at 50% with continued China SOE expansion (apparently to reduce market share of foreign companies ); 

b) anecdotes on soybeans as a form of alternate financing of real estate/ stock market investments over last 2 years (page 4). Does this have some sort of parallel with availability of palm oil below global market prices in China?

Felda Global leaps to "target" and 12% cash-in? (correction)

Khor Reports notes and comments: 

The opening push on Felda Global took the stock to RM5.46, a whisker below the RM5.50-6.00 range that market experts mentioned over a month ago to Khor Reports as the “hoped for” target; as we reported in “FELDA SETTLERS & THE FELDA GLOBAL IPO – a socio‐political perspective” dated 22 May 2012. 

Felda Global's shares closed the day at RM5.30, for a gain of 19% on the RM4.45 per share price for the public (institutions paid RM4.55)#. At this price, its earnings valuation is 15.7x, compared to 17.5x for KL Kepong, 14.4x for Sime Darby and 9.5x for Golden Agri. 

On a day when RM2.8 billion worth of securities were traded on Bursa Malaysia, RM1.5 billion was in the plantation sector. Felda Global was enjoying its debut, and it generated a huge value traded of about RM1.4 billion, or half of the Malaysian bourse's activity. It's not yet part of the FBM KLCI index of 30 stocks@, but it is expected to enter in the future. Among the largest Malaysian plantation stocks, Felda Global's RM19.3 billion market capitalization currently puts it behind KL Kepong with RM24.5 billion, but ahead of PPB Group (which has a key stake in Wilmar International) with RM18.8 billion.

Holders of shares from the offer for sale and the public issue will be sitting pretty with gains in excess of RM1.4 billion today, with about 12% trading their holdings on the first day, locking in gains of some RM170 million.

However, a Reuters news article raises questions about how the shares in Felda Global were allocated. It quotes: "This Felda IPO is an embarrassment," said an official with a Malaysian bank-backed fund management firm. "About 23 percent of the book was allocated to 'friends and family', all at the expense of legitimate investors with potential synergies."  

The share allocation by Felda Global is summarised in its IPO prospectus in the table below, but there is little information yet on total shares allocated to key executives and details of major shareholders.

 @ http://www.ftse.com/objects/csv_to_table.jsp?infoCode=bm1c&theseFilters=&csvAll=&theseColumns=MSwyLDMsMjA=&theseTitles=&tableTitle=FTSE%20Bursa%20Malaysia%20KLCI&dl=&p_encoded=1

#Correction at 11.20am on 29 June 2012, of 2nd paragraph on retail and institutional price, so that the gain is 19% not 16.5% on retail IPO price.

Some news reports:

The Edge Malaysia: "FGV is the third largest planter in the world after Sime Darby and Singapore-listed Golden Agri-Resources Ltd. As a yardstick, Sime is currently trading at an average of roughly 14.4 times estimated earnings for 2012/13, and Golden Agri at 63 Singapore cents is valued at 9.5 times estimated earnings for 2012 and and 8.8 times for 2013."  http://www.theedgemalaysia.com/business-news/216198-fgvh-fails-to-sustain-debut-momentum-.html

Reuters:

"The strong debut beat market expectations of a first day pop of 10 percent and brushed aside, for now, a widely flagged 36 percent drop in Felda Global's first-quarter profit to 223.2 million ringgit ($70 million) that unnerved some investors."

"To keep the farmers happy, government-linked funds and the domestic pension fund, which accounted for part of the institutional tranche, made a rush for the stock during the book-building process."

"This Felda IPO is an embarrassment," said an official with a Malaysian bank-backed fund management firm. "About 23 percent of the book was allocated to 'friends and family', all at the expense of legitimate investors with potential synergies."

Reuters news feature, "Malaysia's Felda surges 20 percent in debut of world's No.2 IPO," http://www.reuters.com/article/2012/06/28/us-malaysia-felda-ipo-idUSBRE85R07S20120628

Felda Global saved major embarrassment over Dreyfus?

Khor Reports notes & comment: 

Last minute negotiations seem to save Felda Global from serious embarrassment, as it doesn't lose one of its (if not "the" most) prominent strategic investors - Louis Dreyfus Commodities. 

However, from an initial offer of 5% to a final take-up of a 0.5% stake (a 90% reduction), as widely reported in newspapers, this seems cold comfort. Thus, 10% of what was initially offered was finally done, and apparently well past the expected cut-off date. Felda Global says that the stake was reduced because of high IPO demand. 

Industry commentators contrast this 0.5% stake with fellow global commodity giant, Archer Daniels Midland's (ADM) 16.4% interest in Wilmar@. Despite the low figure, the 0.5% stake is still touted as a "strategic investment."

On 21 June, the FT notes: "The involvement of Dreyfus as a strategic investor was widely seen as a key element of the biggest IPO since Facebook’s stock market listing last month...“It’s [the Dreyfus involvement] something that’s been pretty prominently talked about as a big ticket item and it’s an embarrassment. This was something that was meant to be a key part of the IPO,” a third person said. “There is a lot of tension and heated tempers right now.”...."  

A strategic partnership is apparently also now in place, although details were not disclosed. It is likely that Louis Dreyfus Commodities sought to market Felda Global's palm oil; but we hear from industry sources that Felda Global may not have been entirely keen to outsource its marketing to third parties.

It would have been interesting to be the proverbial "fly on the wall" when Felda Global and Louis Dreyfus thrashed out the latest strategic investment and strategic partnership. Did Felda Global have to offer better terms to Louis Dreyfus to lure them back, after news reports that its expected stake was given out to others? Was an even better, lower effective price, given to the commodity company?

News articles:

http://www.ft.com/cms/s/0/800756e4-bc48-11e1-a470-00144feabdc0.html#axzz1yfKnP7zo

http://www.reuters.com/article/2012/06/22/felda-louisdreyfus-idUSL3E8HM1M520120622

@"The Company has a 16.4% ownership interest in Wilmar International Limited (Wilmar), a Singapore publicly listed company. Wilmar, a leading agribusiness group in Asia, is engaged in the businesses of oil palm cultivation, oilseeds crushing, edible oils refining, sugar, consumer pack edible oils processing and merchandising, specialty fats, oleo chemicals, biodiesel, fertilizers and soy protein manufacturing, rice and flour milling, and grains merchandising...." 

http://www.adm.com/en-US/investors/Documents/2011-ADM-Annual-Report-EN.pdf

   
 

What do Felda settlers now think of the IPO?

Khor Reports notes and comments: 

I’ve been getting ad hoc feedback from on-the-ground politicians, journalists and locals who have been visiting Felda settlements. There are consistent reports that the Felda settlers are expressing dissatisfaction with a) the RM15,000 bonus payout and b) the 800 shares for which they can subscribe in the Felda Global IPO;  they feel they ought to have gotten more. Also, there is a fundamental question about whether Felda should be about new settlers again.
 

The RM15,000 bonus is causing family squabbles?

The RM15,000 is paid out in three tranches. The first RM5,000 has been paid to the Felda settler - the male head of the household. Apparently, this has generated much friction and strife within the family. The children of these settlers fear that their RM5,000 portion may not be paid, therefore, they are asking their father to distribute to them from his share now. This is a lot of squabbling, as a Felda settler family may 5 or more children, and therefore 7 or more family members (excluding grand-children). This leaves little on a per head basis, if shared immediately. Moreover, we also hear stories that the male family head may have used up the money within a week - in settlement of outstanding debts (creditors were clamouring, knowing about the payout!) and/or in celebrations.


The second RM5,000 tranche to be paid to the wife on the 7th June, has created strife for those with more than one wife. The administration of PM Najib had to intervene on the matter, to say that the payment would be divided equally among all such claimants.


A date for the payment of the third tranche, due to the children of the Felda settler, has not yet been announced. This has caused some uncertainty, and suspicion that it is contingent on general election voting results.


Bottom line: The RM15,000 windfall seems to  insufficient for the Felda settler family size, and it has created unwanted and unforeseen family disputes.


An uneven and politicized share allocation?

The Felda settlers may be increasingly aware that so much more of the "IPO goodies" in terms of share allocation tranche, is widely thought to be directed mostly toward wealthy Bumiputeras, many of whom would be UMNO supporters. The "MITI investors" tranche is viewed by the market in this manner. 

     MITI investors (wealthy Malays likely to support UMNO??): 419.5 million shares
     Felda employees & persons who have contributed: 109.4 million shares
     Felda settlers: 91.2 million shares

New settlers?

Moreover, some Felda settlers suggest that the commercial plantation lands should be given out to new settlers instead of being leased out to Felda Global.


Ideally, an independent sample survey of Felda settler opinions should be conducted. The consistency of these ad hoc findings raises important questions on the likely outcomes of the Felda Global IPO-related bonuses to the Felda settler families. Will these bonuses backfire to some extent, strengthen support or gain more votes in Felda-related constituencies for the next Malaysia general election for the ruling UMNO/BN coalition?

Conclusion: It seems that the pre-electoral goodies offered by the administration of PM Najib to the Felda settlers, from the Felda Global IPO, might be going a bit "flat". 

Felda Global strategic investor woes? (updated)

The Felda Global IPO is next week on 28th June 2012, but at the last minute a pall is cast on the listing by troubling news reports that its strategic partner Louis Dreyfus, a global commodity power house, is pulling out as a strategic investor. The commodity giant was initially offered a 5% stake, but later it was expected to take 2.5%.

News articles:

http://in.reuters.com/article/2012/06/19/us-felda-ipo-idINBRE85I0WY20120619

http://www.theedgemalaysia.com/highlights/215682-fgv-skirts-louis-dreyfus-pullout.html 

Khor Reports comments: 

We heard rumours of a possible Louis Dreyfus pullout at the end of last week, and the news was broken by The Edge Malaysia on Monday. The strategic partnership may still proceed, but the investment stake seems to be in doubt.

It is unfortunate that Felda Global had earlier touted Cargill and Bunge as possible investors and failed to secure either. Worse now, and well past the company’s cut-off date of 13 June for book building, it seems that Louis Dreyfus and Felda Global are still in negotiation and neither has yet to come out to categorically and convincingly deny the news reports of a pullout. 

The industry chatter was that Dreyfus might want to aggressively expand its palm oil physical trade presence, and would be keen to invest, while the others were ambivalent. This eleventh hour uncertainty over a strategic investor, a commodity powerhouse, could add a serious pall to the upcoming IPO. 

Felda Global has tried to calm the market by reiterating that it has many other strategic investors and that the over subscription for its shares is vast. However, many market players and commentators openly express doubts on the high figures reported. Furthermore, none of the other strategic investors have the clout and credibility of catching one such as Louis Dreyfus. 

The commodity giants are already invested in the palm oil trade. These include ADM which has a 15% strategic stake in Wilmar. Bunge and Cargill have palm businesses via Tiga Pilar Plantations and the Cargill-Temasek joint venture, respectively.Louis Dreyfus has a 50% stake in a bulking installation in Kalimantan with Kencana Agri. It also has an upstream presence via a green-field site on which planting operations started in late 2008, and whose grassland areas will only be planted.

Updated 21 June, 9.25pm for commodity giants palm interests.

yulengJune 21, 2012 12:04 PM

Today's news report says that Louis Dreyfus is not a strategic investor at this point, and its stake has been "snapped up" by others.
http://in.reuters.com/article/2012/06/21/malaysia-press-idINL3E8HL0A320120621

Khor Report Facebook page activity

We have started to more actively update the Khor Reports Facebook page. Included are links to news articles which we think are interesting to our readers. We are also updating you on events such as presentations, newsletter and news article releases there. 

Please do visit our page here: 

http://www.facebook.com/pages/Khor-Reports/116785031706985.

Conference - algal biofuels

I am in Singapore the next 2 days, at the "Biofuel 2012 - alternative aviation fuel in Asia conference and Asean algae biofuel initiative conference."

Khor Reports notes and comment:

Why are we attending? Every senior scientist we've met (from lipid technologists to energy specialists) is excited about the prospect of algal oils - microalgae are the most productive 'plants' on earth (oil yield potential could be 5 x that of palm oil on a per hectare basis), a wide range of metabolites, and its genetic engineering possibilities.

Right now, we're seated with microbiologists and transport energy consultants. We are hearing about:
o R. opacus is high in palmitic and oleic acids and there are odd chain fatty acids.
o A 2.5ha demonstration plot with USD80 million investment at Kona, Hawaii with photobioreactors.

How does this touch on palm oil? First, a positive. There's a potential use for POME in the cultivation process. Second, a competitive concern: the likes of global giant Unilever says it hopes to replace palm oil in its Dove soap and some other skin care products with algal oils, with a target date 2017.

There are significant scientific and engineering challenges to overcome. They include the selection and optimizing the best strains (development of GM strains), choice of feedstock for sugars (issues in availability and performance) for fermentation, and extraction (the cost of drying the algae or wet extraction - the separation of oil from an aqueous solution), and large scale cultivation technology issues (biological contaminants, lipid enhancement - optimization to enhance productivity and yield, Co2 sources).

How about the economics of production? The demonstration plot at Kona shows that it's not commercially viable for biofuels - capex and opex is too high for lipid output alone (28% of the algae biomass). There is need for production of co-products - protein and carbohydrate and omega-3 fatty acids (PUFAs). With all products, revenue USd4818/MT and production cost USD1389/MT, and gross margin USD2792. From this study, the biofuel is a co-product! But costs could be lower in Asia versus this demonstration plot feasibility study (Hawaii has high costs).

GM crops in 2011

GM crops around the world in 2011 – map; New data from the annual report by the International Service for the Acquisition of Agribiotic Applications shows where farmers are growing GM crops around the world; http://www.guardian.co.uk/environment/graphic/2012/feb/09/gm-crops-world-2011-map?intcmp=122.




Khor Reports comment: Note the large acreage with GM soybean in US, Brazil, Argentina and South Africa; indicated as second to maize.

Palm oil biodiesel fails?

"....new data comes from a leak obtained by EurActiv from the European Commission. The EC is considering what level of carbon emissions each type of biofuel causes once burned, after everything - including "indirect land-use change" - is taken into account.... The EU's scheme for certifying biofuels as sustainable requires them to emit 35% less CO2 than regular fuel, increasing to 60% by 2018, making palm oil, soy bean, rapeseed and sunflower looking all but dead.... Palm oil biodiesel also received another blow on Friday, with the US Environmental Protection Agency suggesting it fails to meet the US requirement of emitting at least 20% less carbon than diesel from crude oil....The European Union's target for 10% of all transport fuels to be biofuels by 2020 has been described as "unethical" because the production of some types violates human rights and damages the environment. But the same researchers described do nothing to find alternative to the fossil fuels that currently power transport as "immoral".... So the difficult task of distinguishing good and bad biofuels remains essential, as does the research of even more promising technologies, such as algae and seaweed."
http://www.guardian.co.uk/environment/damian-carrington-blog/2012/jan/27/biofuels-biodiesel-ethanol-palm-oil

Other news, Amazon rainforest mapped, http://www.guardian.co.uk/environment/2012/jan/27/amazon-rainforest-map-biodiversity-detail.

Older news, UK firm's failed biofuel dream wrecks lives of Tanzania villagers; The collapse of Sun Biofuels has left hundreds of Tanzanians landless, jobless, and in despair for the future
http://www.guardian.co.uk/environment/2011/oct/30/africa-poor-west-biofuel-betrayal.

Khor Reports comment: The inclusion of indirect land-use change seems to throw out many feedstocks for biofuels - palm oil, soybean oil and rapeseed oil. Palm oil with methane capture is only so much better than crude oil, it seems. Sugar cane passes muster, and so does maize. In tighter and more troubled economic times in Europe, one has to wonder at commitment to subsidies on biofuels?

Conservation news links - on algae and REDD

GM microbe breakthrough paves way for large-scale seaweed farming for biofuels; Scientists have created a genetically engineered microbe that turns the algae into low-carbon biofuel, but must make the technique commercially viable; http://www.guardian.co.uk/environment/2012/jan/19/gm-microbe-seaweed-biofuels; "...using 3% of the world's coastal waters to grow seaweed would produce 60bn gallons of ethanol..."

Conserving biodiversity hotspots 'could bring world's poor $500bn a year'; Study puts economic value on the indirect ecosystem services provided by the world's poorest people; http://www.guardian.co.uk/environment/2012/jan/20/conserving-biodiversity-poor-economic-value?intcmp=122

Khor Reports comments:
a) Algal oils are a hoped for alternative source for biofuels and also for consumer product usage. Unilever is hoping to replace palm oil with algal oils in some of its Dove Soap products and others within 5 years or so.
b) Who pays for conservation? REDD+ programs seem to be at early pilot test stages. Norway has the USD 1 billion deforestation moratorium deal with Indonesia. Ecuador is offering not to develop a rainforest area if it gets paid 1/2 of the potential revenue from extracting the hydrocarbons there.