esm7i To the novice investor or otherwise uninitiated, the ubiquity of palm oil as a global commodity cannot be overstated. It is a super crop with EBITDA margins > 50%, is the world’s most consumed edible oil, and is one of the most versatile raw material/substrate bases known to the industry.
This article explores the sparsely understood world of palm, including its cultivation, harvest, and application processes, its financial and investment profile, and, ultimately, the trends governing its future.
THE PALM UNIVERSE
Palm oil (Elaeis guineensis) is a tropical edible vegetable oil derived from both the pulp (mesocarp) of the palm fruit, yielding crude palm oil (CPO), and from the palm’s fruit kernel (endosperm), producing palm kernel oil (PKO); oils that differ in quality, density, composition, and end application.
Palm oil, which we will refer to herein as CPO, accounts for 35% of the world’s vegetable oil market. The oil palm tree grows under strict agroecological conditions and is only found in tropical regions that fall within 10 degrees north or south of the equator. These regions must be characterized by abundant levels of rainfall throughout the year, given the perennial profile of the crop, with minimum rain of approximately 325 liters per day per planted tree.
As of 2016, there were 17 million hectares of mature palm oil plantations across the equator, producing a total of 65 million tons of CPO for global consumption. By way of context, the next largest global vegetable oil by volume is soya bean, which had 120 million planted hectares, producing 48 million tons of soya oil as of 2016.
REGIONAL DISTRIBUTION
Since 1980, palm oil production has been dominated by two countries: Indonesia (53% of output) and Malaysia (31% of production), which collectively account for 84% of global CPO volumes. Recently, however, Nigeria, Thailand, and Columbia have emerged as globally competitive players, collectively accounting for another 7% – 8% of total global CPO output and rising.
Commensurately, the world’s largest consumers of palm oil are India and China, who import 21% and 16% of the world’s CPO, respectively, followed by the European Union–specifically, Italy, the Netherlands, Spain, Germany, and the UK–whose confectionary and biomass industries collectively account for another 7% – 8% of global consumption.
THE PALM VALUE CHAIN
The palm oil value chain is thought of and structured similarly to that of the crude oil (petroleum) industry. It is comprised of an upstream segment (planting, cultivation, and harvest), a midstream segment (refining and processing), and a downstream segment (retail of end-products, brands, and industrial derivatives).
UPSTREAM: PLANTING, CULTIVATION, AND HARVESTING
Palm oil is planted in two stages. The first, the nursery stage, involves artificially germinating palm seeds (slightly larger than grapes) in plastic containers and growing them in controlled net houses. At the three-month mark, these germinated plants are transferred to an open field for another 6 – 8 months (yielding a total of one year) until final transplantation. Here, the young palms are planted about nine meters apart, resulting in 128 to 140 trees per hectare.
Oil palm generally begins to bear fruit 30 months (two and a half years) after field planting, with commercial harvest commencing six months later. However, the yield of an oil palm tree is relatively low at this stage and remains so until year seven. It is only at year seven that the tree reaches peak production, where its output remains until its 18th year, after which it begins its decline. The typical commercial lifespan of an oil palm tree is approximately 25 years.
Fully mature oil palms produce 18 to 30 metric tons of fresh fruit bunches (FFB) per hectare. The yield depends on a variety of factors, including age, seed quality, soil and climatic conditions, quality of plantation management, and the timely harvesting and processing of FFB. The ripeness of FFB harvested is critical in maximizing the quality and quantity of palm oil extracted.
At this juncture, it is important to note that the first eight years are really the most critical to a plantation’s success and where an experienced management team is vital. Details such as a sub-optimal spacing between trees during planting, an ineffective irrigation system, poor fertilizer, water inefficiency, and insufficient disease control can result in a sub-optimized upstream investment for the remaining 22-year duration of the plantation’s life–an expensive and often devastating mistake made by inexperienced plantation owners.
MIDSTREAM: CRUSHING, REFINING, AND PROCESSING
The milling of fresh fruit bunches (FFB) must take place within 24 hours of harvesting to minimize the buildup of fatty acids that lower the commercial value of the processed palm. FFB is first transferred to the palm oil mills for sterilization (high-pressure steam); after that, the palm fruits are enzyme-deactivated and separated from the palm bunches. After steaming, the palm fruitlets are crushed in a pressing machine to obtain the palm oil.
As previously mentioned, the palm oil palm comes in two types: CPO from the flesh of the fruit and PKO from the seed or kernel. For every ten tons of CPO derived, one ton of PKO is produced. For CPO, waste and water are then cleared and separated from the CPO by means of a centrifuge. The cleared CPO is then sent for refining, while the palm kernel nut is sent for crushing. The empty fruit bunches and liquid waste arising from the process are recycled as fertilizer in the plantations.
Both CPO and PKO then go through a second stage of refining where impurities, colors (by bleaching), and odors (by deodorizing) are removed, and the oil is processed into different grades via fractionation. The output of these processes is palm stearin (solid at room temperature) and palm olein (liquid at room temperature) fractions, whose different properties make them suitable for a variety of food and non-food products.
DOWNSTREAM: END APPLICATION
The downstream segment of palm oil represents the retailing of the end derivatives/products produced by the refining process. These include palm olein (CPO), palm stearin (CPO and PKO), palm kernel cake (PKO), and other substrate bases. Of the various derivatives, CPO olein and stearin are the leading segments among palm products, owing to their versatility and application range, from edible oil, surfactants, and cosmetics to biofuel, animal feed, and lubricants.
The full range of end categories and products that use CPO and PKO derivatives as raw materials are as follows:
Food: Palm oil is the major ingredient in cooking oils, industrial frying fats, margarine, vegetable ghee, candy, ice cream, non-dairy creamer, salad dressing, cheese analog, supplements, and condiments.
Cosmetics and Personal Care: Palm is one of the major ingredients in most cosmetic products. It is used widely in balms and lipsticks due to its luster and color-holding aspects; in soaps, candles, and detergents due to its texture; and as a base ingredient in creams and skin-based pharmaceuticals (especially anti-aging products) because of its tocopherol and tocotrienol properties, both known to be absorbent, healing agents.
Oleochemicals: Oleochemicals are the oils and fats derived from natural plants and animals that are subsequently broken down into fatty acids, esters, glycerol, and others. Palm oil is a raw material in oleoresins, used in the production of surfactants, agrochemicals, lubricants, grease, industrial cleaning products, and printing ink.
Energy and Biomass: Palm oil is used as cheap feedstock for many biodiesel plants across Southeast Asia and Europe. This end application has been one of the major drivers of Palm’s recent success and growth.
Livestock: Palm kernel, due to its high average protein level of 22%, is a fantastic but cheap source of nutritional value in animal feed and supplemental products.
