Monday, May 18, 2009
Further Clarifications On IOI Corp
Gamelion said... There had been defaults for sure, and every time when prices plunge, there are bound to be defaults, because the situation "allows" them to default. IOI has stated that it has required smaller buyers now to put up bankers guarantee. The company will lose some business because of that because smaller sellers may not require that. Sometimes companies can only operate alongside what the majority are doing, if not, they risk losing business. In CPO, you can have the edge in production and yield management, but after it becomes a finished product, its a commodity, your palm oil is no different from those bought from a competitor. Hence if you put up "safeguards", it will affect your business. Lower production may have to do with better yield management in light of weaker prices. You can delay "harvesting" somewhat and manage your plantations to some degree. Hence lower production should not be a major cause for concern.
There will always be new competitors. Its the same for all commodities. When oil prices shoot up, there are plenty of new drilling and exploration, and even new technologies being used. We have to be clear that palm oil is still much cheaper than most alternatives, and still being unfairly painted as it is certainly a healthier alternative to most substitutes. We also have to know that it need temperate climate, and we are really do not have vast tracts of land left. You need a huge land base to have strong economies of scale, what you don't want is many small plantations scattered everywhere. In many areas, oil palm favours large players and established players with upstream and downstream businesses.
Currency losses can never be avoided, they can only be mitigated. IOI's losses is a concern as it speaks volumes on their hedging activity, registering those losses as a percentage of revenue basically implies that management takes a certain view on certain currencies. Investors do not want that. Investors want to buy a CPO producer and a good one at that, currency management expertise is not part of the deal. IOI management should eliminate that from their management purview.
p/s photo: Meisa Kuroki