The Star

Thursday December 27, 2007

Crude palm oil prices are expected to be well-supported by structural changes in global supply and demand for related commodities, says KL Kepong group plantations director Roy Lim Kiam Chye.

Roy Lim Kiam Chye

ROY LIM KIAM CHYE

Group Plantations Director
Kuala Lumpur Kepong Bhd

WHAT are your views on the escalating risks in the plantation sector’s crucial growth parameters such as the scope of expanding oil palm areas, control of harvesting costs and maintaining high yields?

I would rather use the word challenges than risks that are associated with expansion of oil palm areas in Malaysia. These include the lack of suitable land and experienced planters, and the increasing difficulty of recruiting labour for plantation operations.

The best lands have long been acquired, and the choice of expanding would be limited to either acquisition of existing plantations, if they are available and which is currently expensive, or moving into marginal land.

The other option is to look offshore to Indonesia where land and labour are still available, although the choice pieces have also been taken.

Control of rising cost of production as a result of rising wages and sharply escalating price of fertilisers and general inflationary tendencies is a cause for concern, and may be mitigated by increasing yields through excellent agro management, although this is constrained by the fertility of the soil, terrain and weather in less than ideal locations.

What is the 2008 growth outlook for the biofuel/biodiesel industry in Malaysia amid the international trade limitations, high feedstock (CPO) prices, sustainability and food versus fuel debate?

The growth of the Malaysian biodiesel industry would continue albeit at a slower pace on account of high feedstock prices and thinner margins, and the industry is anxiously awaiting an official policy from the Government.

Furthermore, we can expect stiff competition from Indonesia, whose producers currently enjoy a lower CPO price after the government increased CPO export duty by up to 10%.

The Malaysian biodiesel industry currently depends on export, as there is now no mandatory blending policy in the country and may face artificial trade barriers into EU on account of sustainability issues.

The expected strong growth in the edible oils sector, particularly from China and India, and the anticipated tight supply of oilseeds in 2008 would pose difficulties for the biodiesel industry in terms of competition for raw materials and their resultant firm prices.

However, for the rest of the world, based on either vegetable oils (palm oil, rapeseed oil etc) or agricultural products (corn or sugar cane), the biodiesel industry would continue to flourish in countries that are prepared to subsidise or introduce mandatory blending ratios.

Do you agree that the structural changes in global commodities supply and demand patterns, i.e. the biodiesel market, the fight for hectarage to plant corn for ethanol instead of soybean and rapeseed in the US and South America, trans fatty acid concerns, and China and India relaxing their palm oil import tariffs, will lend support to higher CPO prices in 2008?

Most commodities – metal, rubber, petroleum and vegetable oils – are going through a bull market. We agree that the price of CPO would be well supported by the structural changes in the complex global supply and demand for a host of related commodities. CPO price is now closely correlated to that of mineral oil and often moves in tandem with it.

Besides, supply pressure from the growth in the edible oil sector and the expected competition for acreage between grains (corn and wheat) and oilseeds (primarily soybeans) in the next planting season in the northern hemisphere would lend further support to the price of CPO.

Health issues like trans fatty acids have boosted the demand for palm oil, particularly in the US, and elsewhere the vagaries of weather and smaller crops in consuming countries would require the necessary imports to meet demand and reduce inflationary pressure.

Please comment on your company’s strategies in 2008 and the rationale behind it, with regard to overseas expansion, refineries, mills, biomass, biodiesel projects or carbon credit initiatives.

Our strategy for plantations going into 2008 would continue to leverage on our 13 years’ experience in Indonesia to scout for opportunities to expand our landbank as opportunities in Malaysia are limited. Infrastructure and processing facilities would be put in to support our increasing mature areas in Indonesia.

Our refining operations will mainly concentrate in our new and enlarged plant in Lahad Datu, which is linked up to our edible oils and oleochemical operations in China.

Expanded palm kernel crushing in East Malaysia and a new facility in Sumatra would constitute a major supply chain for our fast growing oleochemical operations in Malaysia, China and Europe.

We will further our efforts to address “sustainable issues” through good practices, recycling of waste and earn carbon credits in the process.

The current volatility in CPO price of RM2,900 to RM3,000 per tonne have made it very difficult for planters to lock in their selling prices. At what price would your company be “comfortable” for FY2008 and FY2009. (Kindly indicate your average cost of production annually).

The current price of CPO is very comfortable for all plantation companies. Although strong fundamentals would support the CPO price in 2008, whether they will soar further from the RM3,000 per tonne mark is left to be seen.

We have adopted a prudent approach to commit sales at each level of improvement in prices to minimise any risk that may arise from the uncertainty that may arise in the global economy from the sub-prime problems in the US.

We expect our CPO cost to be inflated by high price of fertilisers and operating costs to about RM890 per tonne.

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