Investment drives increasing production of palm oil

An historic staple of West and Central African agriculture, palm oil production on the continent began to decline in the 1960s as African governments prioritised oil and mineral extraction over agriculture. At the same time, the establishment of large-scale oil palm farms in Asia pushed down the price of imported palm oil products, prompting a further decline in Africa’s domestic palm oil market. Like most of its neighbours, Gabon relies on imports to meet domestic demand. Palm oil imports reached €31.5m in 2011, ranking second among agricultural imports by value and third by volume, at 26,564 tonnes. By contrast, in the same year, exports of palm oil were valued at €184,336 and totalled 408 tonnes.

Government Strategy

Along with other cash crops, the government is targeting palm oil production as part of the strategy to achieve economic diversification and reduce dependence on oil revenues. Under the Green Gabon component of the Emerging Gabon plan, which aims to have the nation achieve emerging country status by 2025, the government has set a palm oil production target of 280,000 tonnes by 2016, representing a significant increase over output of 8800 tonnes in 2008. Gabon is currently on track to meet this goal, having achieved output of over 50,000 tonnes in 2012. Much of this will be destined for export within the sub-region, but the government also hopes that higher production levels will improve food security by reducing the need for imports.

Growth Potential

Although 85% of global palm oil output comes from Malaysia and Indonesia, West and Central Africa are increasingly attracting the interest of investors faced with the decreasing availability of suitable land in Asia. Demand is on the rise, and Bloomberg reported in April 2013 that palm oil was already the most used cooking oil in the world. According to a 2013 “Commodity Markets Outlook” put out by the World Bank, China and India account for a third of global consumption of edible oils; rapid population growth and increasing purchasing power in these two countries will contribute significantly to the swelling demand for palm oil. Sub-Saharan Africa is another major contributor to the expanding consumer market, as rapid population growth in West Africa drives up demand for palm oil in the sub-region.

“There is a growing regional consumer market for palm oil. Per-capita consumption in Africa is currently much lower than in India and China, and as more people enter the middle class, the demand is only going to increase. Population growth is driving demand, but so is the rising standard of living. As people move from a lower social economic level to a higher one, their eating habits change and they consume more pasta, more cooked food and more palm oil,” Gagan Gupta, country head for Olam International in Gabon, explained. In recognition of its local advantage and strong forecast growth in global demand for palm oil, Gabon will focus on production for export, to supply the burgeoning West African consumer market. “The demand for palm oil in sub-Saharan Africa is huge and producing it here gives us a large freight advantage; we can sell to Cameroon, to Nigeria… palm oil production here can be very competitive compared with in Asia,” said Gupta. Gabon also has a large land advantage, with 5m ha of land available for palm oil plantations, 1m of which is ready for immediate use. Palm oil’s increasing use as a biofuel is a further driver of global demand, with mandatory fuel blending targets being adopted in some countries.

FDI 

Currently, the biggest foreign investor in Gabon’s palm oil sector in terms of both money invested and land area planted is Singapore-based Olam International, which in 2010 entered into a joint venture with the government to develop an initial 50,000 ha of oil palm plantations and set up milling facilities for the processing of crude palm oil. Including the processing facilities, total investment in the palm oil project is expected to reach $500m. The government holds a 30% share, but in March 2014 Olam announced the government’s plans to contribute a further €42.4m, raising its equity in the project to 40%, while Olam retains a 60% share. The deal guarantees Olam an eventual 300,000 ha for palm oil and rubber operations, as well as other incentives, such as a 16-year income tax holiday and exemptions from value-added tax and Customs duties on imports of machinery and production inputs. As of June 2014, Olam Gabon had planted 16,600 ha of oil palms in the two project sites of Awala and Mouila, with the 50,000-ha goal in sight for 2017. Olam’s palm oil and rubber projects have so far created a total of 4800 direct jobs in Gabon.

Another major foreign investor, the Chinese consortium the Julong Group, is eyeing a potential €1.5bn investment in palm oil plantations in Central and West Africa with the goal of supplying the African consumer market, though no specific country has yet been announced for the project.

Société Belge d’Investissement pour l’Agriculture Tropicale (SIAT) purchased the hitherto state-owned AgroGabon when it was privatised in 2004 and operates palm oil and rubber plantations stretching over more than 15,000 ha. SIAT signed a new 10-year contract in July 2014 to expand its palm oil operations with a planned investment of CFA315bn (€472.5m) over the next 10 years and promised to create 6000 jobs in the agro-industrial sector. Expansion plans include the planting or replanting of up to 10,000 ha of oil palms and upgrades to palm oil processing complexes in Makouké and Lambaréné.

In 2013 SIAT’s palm oil activities comprised almost 7000 ha of plantations as well as processing facilities, including a mill with a capacity of 30 tonnes per hour, a soap factory with a capacity of 15,000 tonnes per year and a refinery with a capacity of 20,000 tonnes per year. SIAT Gabon made its initial public offering on the regional stock exchange in April 2013, and its palm operations target primarily the domestic consumer market, with the goal of eventually meeting 100% of domestic demand.

Workforce

As a labour-intensive field, palm oil production has the potential to boost employment significantly and spur rural development, yet few Gabonese possess the technical skills and agricultural experience necessary for short-term sector growth. Gabon’s labour laws mandate a 90% local hiring quota, which will improve the industry’s contribution to overall growth in the long term, but may hinder short-term expansion. Foreign investors will need to import qualified expatriate workers mainly in a training capacity with an emphasis on developing the skill set of the local workforce. More flexible labour policies, at least in an initial period, would facilitate companies’ ability to do this. Labour costs are high by regional standards, but are in line with those of some other major producers. “Labour costs are similar in Malaysia, a primary competitor in the palm oil market, and are expected to increase in other African countries. In terms of labour costs, Gabon has the potential to be competitive in the long term,” Gupta said.

Sustainable Oil

The yield from fields currently being planted at Olam’s plantations is expected to reach around 22 tonnes per ha, somewhat below the 25 or 26 tonnes per ha achieved by some producers in Malaysia and Indonesia. Gabon’s palm oil industry has an advantage that many older producers do not, however, in that its products meet international standards of sustainability. Both SIAT and Olam are members of the Roundtable on Sustainable Palm Oil (RSPO), an initiative of the World Wildlife Fund. According to RSPO data, just 15% of global production is RSPO-compliant, and as more and more consumer countries move toward traceability and sustainability requirements for imported agricultural products – as the EU is in the process of doing – Gabon’s advantage as an exporter will grow. A focus on sustainability has also helped palm oil investors in Gabon to thus far successfully navigate some of the challenges faced by operators elsewhere, such as establishing land-ownership rights and managing the relationship with local communities near plantation sites. As Gupta said, “In sub-Saharan Africa, many countries rely on extractive industries for revenues, but extractive industries don’t create a lot of jobs, and so countries are beginning to invest more in agriculture as a means of job creation. To succeed, however, agriculture projects must take into account, and invest in, local communities.”