Channel News Asia | 15 November 2010
By Travis TeoSINGAPORE: Commodities company Olam recently announced plans to invest US$1.5 billion in the African country of Gabon. And it said at full production, its new fertiliser plant and palm oil unit will generate a combined revenue of US$675 million annually. This means that by 2015, one-fifth of Olam's revenue will come from Africa, up from the current 14 to 15 per cent. Olam is betting on Africa to double its net profit margin to 5.2 per cent in five years and analysts have said that it is an achievable target. Demand for agricultural commodities has outstripped supply for the last 9 out of 10 years and agri-commodities companies are increasingly turning to unexplored regions like Africa for their resource needs. But Africa is still a risky bet. "How we manage the political and sovereign risk is to take a risk insurance cover, a political risk insurance cover call PRI, in the London Lloyd's Market. And in addition to that for specific projects, we try to secure MIGA guarantees, the multi lateral investment guarantee agency, MIGA, which is a world bank body for project risk insurance, and by diversifying...we are able to mitigate and manage these risks," said Sunny Verghese, Group Managing Director and CEO of Olam. Large tracts of land and cheap manpower in the second-fastest-growing continent in the world make Africa an attractive investment for commodities companies that are increasingly seeking to attain scale. Analysts added that the recent merger talks between Olam and Louis Dreyfus, which dominates rice imports by Africa, can potentially give the combined entities the advantage of pricing power. James Koh, an Analyst with Kim Eng, feels that there will be a long term increase in prices of commodities. "The long term supply demand trends points to a long term increase in prices, but I don't think that its necessary means that every commodity related company will benefit from this boom. For one thing, I think you need to be well capitalised, you need to be a substantial player, we are already seeing a wave of consolidation in this sector. I think with the recession you are finding that people are preferring to deal with the bigger players like Olam, like Noble, because there's less counter party risk." It also helps to have on-the-ground experience of doing business in Africa. And in that regard, analysts said, Olam, which started exporting cashews out of Nigeria in 1989, has a huge advantage. Overall analysts have a positive view of commodities companies like Olam and Nobel. "This is one sector where we see that we can still achieve growth, especially now that the risk of a double dip recession is subsiding. These are well capitalised players where they have the financial muscles to do M&A deal, identify good investment and take advantage of the low interest rate environment. That will help generate value for shareholders," said Mr Koh.