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Saturday September 15, 2012
By HANIM ADNAN firstname.lastname@example.org
THE dwindling supply of raw commodities has become a major concern among local downstream commodity-based industry players despite Malaysia being a world producer of palm oil, rubber, cocoa and to a certain extent rich in mineral resources such as gold, iron ore and coal.
This situation has resulted in huge dependency on imported commodities which has seen downstream players encountering rising costs when purchasing raw materials from world markets.
However, in recent years, there has been a growing trend where local downstream producers such as rubber glove makers, cocoa grinders, oil palm plantation cum refineries and steel millers are seeking merger or acquisition (M&A) opportunities in the upstream sector, especially in Asia-Pacific.
Many were seen acquiring both brown and green fields for rubber, oil palm, cocoa and sugar in Indonesia, Thailand, Cambodia and Vietnam while the latest craze is in an iron ore mining concession in Malaysia.
“The rationale is to ensure steady supply of raw materials and reduce dependency on commodities, which are often bought at volatile market prices,” says an analyst with a bank-backed brokerage.
He tells StarBizWeek that more importantly, the strategic decision by local downstream players makes sense as “it will enable massive cost savings, a natural hedge against the volatile nature of the commodity prices as well as for companies to possibly enlarge their earnings base.”
There will be an opportunity for expansion by manufacturing facilities where the raw materials can be easily sourced, adds the analyst.
He points out the significance of safeguarding local downstream commodity-based industries as it is one of the biggest contributors to the country's economy.
Inconsistent supply of raw materials for local downstream players, if not properly addressed, can disrupt production as well as exports.
In the worst case scenario, an industry expert says some players may even seriously consider relocating their production facility from Malaysia to where the raw material can be easily sourced.
For example, local palm oil refineries are currently deprived of CPO supply from Indonesia when the latter decided to slash its export duty on palm oil refined products last year to encourage more CPO to be processed by Indonesian refineries.
That move lessens the amount of CPO exported out of the republic.
The policy move by Indonesia led Mewah Group, one of the world's largest palm oil processors, to discontinue plans to invest in Sabah while KL Kepong Bhd is now planning to build three refineries in Indonesia to take advantage of the high margin for palm oil refiners in the republic.
Palm Oil Refiners Association chief executive officer Mohammad Jaaffar Ahmad recently said the existing Indonesian palm oil export duty structure has become an increasing threat to Malaysia's RM6bil palm oil downstream industry which is uncompetitive and suffering hefty losses.
In the case of local rubber gloves makers, the annual natural rubber production in Malaysia is not sufficient to cater to the booming local rubber gloves sector.
The local glove industry now commands about 60% of the total world production.
Top Glove Corp Bhd is the first among local rubber glove makers to venture into the upstream rubber plantation overseas.
Top Glove executive director Lim Cheong Guan was reported as saying recently that the Group planned to plant enough rubber to meet 40% of its latex supply security.
Kossan Rubber Industries Bhd is also following suit with its proposed greenfield land acquisition to cultivate 10,000ha of rubber either in Myanmar or Indonesia.
Despite the excitement among some rubber glove makers to cultivate rubber overseas, CIMB Research, in its recent note, says it believes glovemakers should focus on manufacturing, distribution and brand development, and “not the management of plantation estates.”
Also, the use of derivative instruments will be a less capital-intensive method to hedge costs, it adds.
Another player is Felda Global Ventures Holdings Bhd's sugar refinery unit, MSM Holdings Bhd, which is eyeing sugar cane plantations within the Asean region to address the huge gap in its upstream operations.
MSM is the country's biggest sugar refiner with a production capacity of about 1.1 million tonnes. It controls more than half the local sugar market.
Currently, the group is reported to be in talks to buy an initial 30,000ha of land in Myanmar to grow sugarcane.
For local steel millers, the crunch in supply and the rising price of raw material such as iron ore, along with challenges in the form of AFTA and cheaper steel products imported into the country, are certainly bad for business.
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