Chain Reaction Research: BREAKING – Grupo Palmas: First Peruvian NDPE Policy Creates Business Opportunities But Strands Land
Grupo Palmas, including Palmas del Espino and subsidiaries, is specialized in the cultivation and processing of palm oil in the Peruvian Amazon. Grupo Palmas is 100 percent owned by the Peruvian conglomerate Grupo Romero. Grupo Palmas is Peru’s largest producer, refiner and exporter of palm oil.
After past controversies, Grupo Palmas is now shifting to a zero-deforestation approach. On April 4, 2017 Grupo Palmas published its No Deforestation, No Peat, No Exploitation (NDPE) policy that covers palm oil and cocoa. This creates new business opportunities, while also stranding its past expansion plans. These undeveloped concessions would be financially risky to develop.
- Grupo Palmas is working towards a zero-deforestation supply chain. RSPO certification processes are underway, and it recently joined The Forest Trust. Grupo Palmas published its NDPE policy April 4, 2017. It also says it is pursuing growth strategies based on smallholder engagement.
- The adoption of a NDPE policy gives Grupo Palmas a competitive advantage over its main competitors by becoming the market leader for zero-deforestation in Peru. Benefits include maintaining and expanding an international customer base, strengthening relationships with smallholders and improving brand reputation.
- Given Grupo Palmas’ published NDPE policy and current market conditions, four planned projects with a total landbank of 25,000 ha are no longer feasible for development of large-scale palm oil plantations. This land can be considered stranded, and the company needs to pursue alternative ways to create value that does not require any land clearing.
- If, at any point in the future, Grupo Palmas does proceed with the development of any of the four planned projects, it could expose itself to a number of business risks. This could result in loss of clients, significant reputational damage and exposure to regulatory measures. The first can reduce margins, and the second can increase debt costs, and both can lead to a solvency and liquidity crisis in the company as debt and debt service are both high.
- Grupo Palmas has a Net Debt to EBITDA ratio of 7x, and so the company needs to generate cash flow and growth to meet their financial requirements. To generate the sufficient cash flow Palmas should work in keeping their client base, both in Peru and internationally, and if possible work to expand it. The growth should be achieved while taking sustainability policies into account. Expanding the agriculture frontier, without taking deforestation into account can create reputational risks and loss of clients, amplifying Grupo Palmas financial problems.
For more information, please contact Tim Steinweg.