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Palm-oil Producers Feeling The Heat

PalmTreesWith crude oil prices hitting more than US$100 per barrel, palm oil could become the natural alternative fuel.

Palm oil is the highest yielding oil crop, with an output 5-10 times greater per hectare than other leading vegetable oils.

Palm oil is a common cooking ingredient and it is widely used in the chemicals industry for making soaps, cosmetics, detergents. It is also a raw material for biodiesel.

With so many uses for palm oil, it is easy to assume that increased demand should lead to higher prices. However, the opposite is true. Palm oil has fallen roughly 30% from last year to RM 2400 (S$ 955.30) per metric ton due to record stockpiles as supplies outstrip consumption.

Furthermore, the recent haze has turned the spotlight on how big palm-oil players conduct their business in Indonesia. It is known the haze was caused by slash-and-burn tactics for clearing land for the palm oil plantations. Environmental groups and the Singapore and Malaysia governments are looking at tougher regulations. That could mean increased compliance costs for the companies.

Three companies that could be affected are Golden Agri-Resources (SGX: E5H), Wilmar International (SGX: F34) and First Resources (SGX: EB5). The dampened sentiment for the palm oil industry could explain the lack of investor support for their shares.

All is not lost

Mind you, if you take a look at the palm oil futures contracts below, they are expected to rise steadily going into 2015.

Palm oil ftrs price chart

Additionally, according to the IMF, the world economy is still growing at 3%, albeit at a slower pace. Consequently, there may be some undervalued palm oil producers ready for unearthing. But investors will need to be patient.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.