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The Chain: Moody’s maintains negative outlook on IOI as IOI’s Q2 2016 earnings negative, Malaysian palm oil producers may look to Africa

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August 23, 2016

Moody’s maintains negative outlook on IOI while IOI’s Q2 2016 earnings negative

Moody’s announced that it is reverting IOI Corporation’s (IOI:MK) credit outlook as “negative” following the lifting of its suspension by the Roundtable of Sustainable Palm Oil (RSPO). Moody’s issuer rating of IOI is still Baa2, the second lowest investment grade granted by Moody’s.

Moody’s stated that the “negative” outlook was issued because 27 of IOI’s large corporate customers have suspended relationships with IOI due to their illegal deforestation practices. Moody’s also mentioned that the “negative” outlook was granted because IOI faces further potential suspension from RSPO over illegal deforestation and land-grabbing.

Moody’s further stated that IOI is highly leveraged with its debt to EBITDA ratio at roughly four times. “Such a level is high for its Baa2 rating, as also reflected by the ‘negative’ rating outlook,” said Moody’s.

Meanwhile, IOI reported Q2 2016 earnings as a net loss of $14.8 million. Same quarter earnings, compared to last year, were positive at close to $30 million dollars.

Malaysian palm oil producers may look to Africa

Due to market pressures, Malaysian palm oil producers may need to look to Africa for new export markets. Malaysia’s long-time palm oil rival, Indonesia, has traditionally been able to produce palm oil at a lower price due to lower land and labor costs. And now that more competitive levies on Indonesian palm exports were introduced in July 2015, Indonesia continues to assert its dominance of palm oil export markets. Indeed, Indonesian crude palm olein has been selling at a $10 to $20 discount per metric ton compared to average Malaysian prices this year. In 2015, Malaysian palm oil exports totaled 17.5 million tons, trailing rival Indonesia by 9 million tons, or 34%.

As a result of this cost advantage, Indonesia maintains a stronghold on the larger, traditional palm oil markets like China, Pakistan, and Bangladesh. Anecdotally speaking, Chinese imports of Malaysian palm oil declined 14.6% in 2015 from the year before to 2.4 million tons, while its purchases from Indonesia jumped 40% to 3.4 million tons. To remain competitive, Malaysian producers must look to smaller, more risky markets like countries in Africa, according to Mohammad Jaafar Ahmad, the head of the Palm Oil Refiners Association of Malaysia.

Africa is the third largest consumer market for palm oil after Southeast Asia and South Asia. Last year, Africa accounted for 13% of Malaysia’s palm oil sales, with Benin, Nigeria, and Tanzania as key export countries.


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