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Saturday October 22, 2005
StarBiz interviewed PPB Oil Palms Bhd and Tradewinds (M) Bhd on their views on the oil palm sector - which is being buoyed by high palm oil prices - increasing use of palm oil in other areas, and on the potential of biofuel on plantation companies.
Mohd Redza Shah Abdul Wahid
Tradewinds acting CEO
STARBIZ: What would be the factors driving the plantation sector forward?
Redza: Over and above the obvious improvements in cost efficiencies, research and development improvements, trans-fatty acid labelling in the US in 2006 and the impact of China adopting WTO in 2006, a more important development is that a positive environment has emerged of late regarding palm oil.
There is now greater acceptance of palm oil due to its superior properties over other oils, greater recognition of its efficiency, its health and nutritional value – leading to greater propensity to using it for food and industrial uses. This perceptual transformation is one of many reasons causing industrialised nations to specify a gradual shift from other soft oils to palm oil.
Which is why more players, local and international, are investing in oil palm cultivation. A race is on to acquire landbanks in Indonesia. Not just by Indonesian companies or Malaysian-Indonesian joint-venture companies but also by Europeans, reflecting the confidence of the consuming countries in the future of palm oil.
All these developments point to a rosy picture for the industry, which would ultimately drive the sector forward.
StarBiz: Many regard the biodiesel push to be a long-term one. When do you expect to put up your project, if any, and potential for payback? When would the payback period be?
Redza: We too see it as long-term one because there is as yet no specificity what the global or even domestic requirement is for biodiesel. Which makes it difficult to pinpoint marketing, consumption and demand aspects or even estimate payback time with certainty. As such, it is unlikely that Tradewinds will consider venturing into this area in the immediate future although we would unreservedly support the push for biodiesel production.
StarBiz: Do you think the rally on the plantation sector is sustainable?
Redza: A sustainable rally requires that the bull run is supported by fundamentals. The current interest in plantations stocks is driven mainly by investors' excitement over biofuel prospects. While this is a positive development for the industry, it remains to be seen if the translation of the concept into actual business opportunities can be achieved within a reasonable period.
Furthermore, much of the details on biofuel have not been made known. Palm oil constitutes only 5% of biofuel. Another 95% comes from diesel oil, which means the price of diesel oil is a major factor in the equation. Participating plantation companies may have to support this by putting money into diesel oil, the price of which is not within their control.
For this reason, we expect the current strong sentiments to taper off, unless supported by other factors such as immediate investment in biofuel initiatives by both the Government and plantation companies.
Khoo Eng Min
PPB Oil Palms managing director
The biofuel mix at 5% of processed palm oil and 95% of diesel set under the National Biofuel Policy will take up about 4 million tonnes of annual Malaysian palm oil production.
StarBiz: Many people regard the biodiesel push to be a long-term one. When do you expect to put up your project, if any, and potential for payback? When would the payback period be?
Khoo: The biodiesel push will remain in play as long as the biodiesel price remains at or close to mineral diesel price (which is a function of the crude oil price). The relationship between the CPO price and crude oil price is still being worked out to determine the palm diesel breakeven price.
Currently, the high crude oil price augurs well for palm diesel but there are some experts who believe that crude oil could revert to below US$40 per barrel in the future. When that happens, biodiesel may not be competitive.
We know the European Union (EU) and lately, the US, are actively pursuing the biodiesel alternative and both are gearing up biodiesel production. The EU has an installed capacity of 1.83 million tonnes while new capacity in the US totalling 1.6 million tonnes will come on stream by October 2007.
A substantial volume of rapeseed oil in the EU and soybean oil in the US has been or will be diverted towards biodiesel production. The production of biodiesel in these two regions will create a vacuum for edible oils that needs to be filled, and palm oil, being the cheapest and healthy alternative, is poised to replace this demand and can even act as a cheaper feedstock for biodiesel production in these countries.
PPB is currently looking at alternatives to produce biodiesel for its own consumption at its estates and mills as one of the measures to counter the effect of rising fuel cost and to reduce overall cost of production.
However, commercial production of biodiesel will be left to other associates of the group to pursue, if economically feasible.
StarBiz: The plantation sector is staging a rally on the Bursa. Do you think this is sustainable?
Khoo: It is difficult to say whether the current plantation rally is sustainable or how long it will last, as it depends very much on the perception of the investors at large.
The plantation sector is attractive because of favourable CPO prices and its future growth potential, while other sectors offer less attractive investment and growth opportunities.
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