Palm oil firms set for bountiful harvest

  • Business
  • Thursday, 21 Dec 2006

Malaysia's golden crop, the oil palm, has seen demand and attractiveness for its oil increase by leaps and bounds. Golden Hope chief executive Datuk Sabri Ahmad says as the only integrated plantation player, potential merger synergies will be important for the group. Despite many fears about investing in Papua New Guinea, Kulim went ahead to build up its plantations in that country. Managing director Ahamad Mohamad says that has been just about one of the best moves that the group has made in its overseas ventures. The next area of focus will be Kalimantan. The consumer outlook varies from segment to segment. For Rajah Kumar, chairman and CEO of Philips Malaysia, the group sees opportunities in the healthcare and lifestyle segments where a major emphasis is on improving the quality of life. 


DATUK SABRI AHMAD Group Chief Executive Golden Hope Plantations Bhd  


IN your opinion, what do mergers between big plantation groups represent? 

Datuk Sabri Ahmad

Based on the merger plan by Synergy Drive Sdn Bhd, the proposed merger aims to create the largest listed oil palm plantation company in the world. 

Plantation is Golden Hope’s core business. As the only integrated plantation player in Malaysia with investments across the whole plantation industry value chain from research and development, plantations, oils and fats, oleochemicals and biodiesel - both in Malaysia and overseas - the outcome and the implications of the merger is important to us. 

In this respect, Golden Hope has appointed two independent advisers to study and prepare a report on the merger plan and offer made by Synergy Drive to be deliberated by the board of directors. 


Palm oil is no longer considered as a commodity but a major industry, given its versatile usage both in food and biodiesel. Please elaborate on the demand and supply structure for palm oil. 

Today, palm oil is still largely traded as a commodity. However, its demand and attractiveness have increased due to its usage for food and oleochemicals, and recently biodiesel.  

Total crude palm oil (CPO) production in Malaysia in 2005 was 15 million tonnes and for 2006 is forecast at 15.8 million tonnes. The export of CPO and its derivative products totalled 18.62 million tonnes in 2005. 

Globally, 600,000 to 750,000 tonnes of CPO were used for biodiesel production in 2005 and this is expected to grow to one million tonnes in 2007. However, palm oil usage as edible oil in food applications will still be given priority.  

Malaysia and Indonesia have agreed to set aside only six million tonnes a year, or 40% of the combined total production, for biodiesel production. This is to ensure that there will be adequate supply of CPO for the production of food-based products. 


What is the outlook for the palm oil industry in the short and long term? 

In the short term, the palm oil industry is expected to be on an uptrend due largely to increasing demand from traditional markets, mainly China, India, Pakistan, the Middle East and Africa, and also from the boom in biodiesel production.  

Supply shortage has been forecast, especially from Indonesia due to the El Nino phenomenon expected next year. In America, a soy oil shortage is expected as farmers there have the tendency towards planting corn to fulfill the growing demand for corn as bio-ethanol feedstock. 

The factors mentioned, coupled with the increasing demand for biodiesel, could drive palm oil prices further. CPO prices are expected to remain bullish, at RM1,900 to RM2,000 per tonne next year. 

In the long term, the palm oil industry is expected to grow in line with the growing worldwide demand for food production, in oils and fats, oleochemicals and biodiesel.  

The world output of palm oil is expected to overtake that of soybean by year 2015. Palm oil is expected to be the world's number one edible oil by 2020, with production of 43.3 million tonnes. 

We forecast the growth in the world population at 2.1% and rising per capita income will increase the demand for palm oil-based products, both for food and non-food. With the advantages from the point of sustainability, traceability and competitive edge, palm oil has a better future compared with other oils. 


Please describe the challenges and opportunities ahead for oil palm plantation players? 

·The challenge to sustain the industry growth, given the land, labour and capital constraints. Supply may not be able to cope with the increasing demand and this will increase the price of palm oil-based products. 

·With high palm oil prices, palm oil as feedstock could lose some of its competitiveness in the oils and fats market.  

·Growing production cost will require producers to respond with new approaches, technology and best practices to maintain the efficiency and productivity at competitive cost. 

·Tightening of import quotas in major importing countries to protect locally produced feedstock can lead to over supply. 

·Growing pressure from the various NGOs and lobby groups against palm oil. 

There are opportunities arising from growth in biodiesel demand, oleochemical applications and trans-fat-related health concerns, especially in the US, which presents opportunities for trans-fat free palm oil. 


What is the outlook for CPO price in 2007 and its likely impact on your company’s financial performance? 

Looking at the current performance of palm oil and the positive factors that will drive prices higher, 2007 is expected to be a boom year for industry players.  

With the Increased demand for biodiesel and oleochemical application and production, it is not impossible for CPO price to touch RM2,000. 

Golden Hope is optimistic that the company’s financial next year will be better, in line with increased demand and forecast higher prices. It is estimated that every RM100 increase per tonne in CPO price will result in additional profit of up to RM70mil. 


Ahamad Mohamad

AHAMAD MOHAMAD Managing Director Kulim (M) Bhd  

HAS 2006 been a fruitful year for business overseas and how? What are your major overseas investments and how are they faring? Is your group realising profits from overseas ventures and how much of the profits are invested abroad and how much repatriated?  

Since 1996, Kulim has made several overseas investments, specifically in Indonesia and Papua New Guinea (PNG) where we are involved in oil palm plantation and related assets/businesses.  

In 2005, Kulim via our PNG subsidiary, New Britain Palm Oil Limited (NBPOL), ventured into Solomon Islands where we acquired and rehabilitated an abandoned oil palm plantation. 

In Indonesia, we are currently operating in Central Kalimantan. Previously, we had an operation in Sumatra but had divested it early this year as part of a move to consolidate our operations in Indonesia and concentrate on building up a larger operation in Central Kalimantan.  

As of September 2006, Kulim’s total overseas oil palm hectarage account for about 77% of the group’s total titled area and 64% of the planted area.  

For the cumulative quarters in 2006, the group’s overall performance has been encouraging. Profits have approximately doubled from that achieved in the corresponding period last year. Of the total RM166mil pre-tax profit recorded up to September 2006, about half was contributed by overseas businesses.  

Based on the past three years’ record, PNG is Kulim’s biggest overseas earnings contributor and is notable for its increasing turnover and pre-tax profit contribution in terms of percentage.  

Our plantation in Indonesia is still young, with an average age of about five years. As they are in the developmental stage, they have yet to generate adequate profit to be repatriated back to Malaysia.  

However, our decision to dispose of our Sumatran assets proved to be the right move, as we have managed to turn around the operational results of our Indonesian operations from a RM45mil loss for 2005 to RM6.5mil profit as of third quarter 2006.  


What are your plans for your overseas ventures, going into 2007? 

I believe 2007 will be an exciting period for palm oil-based businesses. While in Malaysia much of the industry focus is on adding value through the various downstream businesses, given that land is becoming scarce and expensive for developing new plantation, in Indonesia and PNG, the expansionary efforts are very much driven to maximise the potential of the vast undeveloped land.  

For 2007, our plantation expansion programme will be heavily focused on Kalimantan where 7,000 to 8,000 hectares will be developed annually until 2009. Our new PT GCM mill, which commenced operations in November and will be fully operational in 2007, is set to become another important contributor to the group.  

At the same time, we own 37.5ha at the port of Kunai, Central Kalimantan, and this would be very valuable should we decide to go into building our own refinery or other processing facilities, including biodiesel.  

With regard to our PNG operations, 2007 will see us continuing to expand our plantation area, where about 2,000 to 4,000ha are already being made available.  

At the same time, we are assisting the surrounding local smallholders to develop oil palm plantation, from which additional fresh fruit bunches will be supplied to us for value-added processing.  

Through NBPOL, Kulim is also among the world's largest producers of oil palm seeds known as “Dami”. Dami is a high-quality seed and has been a key factor in helping our PNG plantation achieve a consistent oil extraction rate of above 22%. We will be working aggressively towards getting the seeds into Malaysia and Indonesia, firstly to be used in our own plantation and then to third parties.  

Our unique geographical spread of plantation businesses offers us a tremendous synergistic and risk optimisation opportunity. For 2007, we will be looking at implementing measures to further enhance the potential benefits of cross-border collaborations and knowledge sharing. 

An example is our biodiesel joint venture in Singapore with Cremer Gruppe, which would provide another critical dimension to the group’s operations, complementing a similar plant in Tanjung Langsat. Furthermore, the output from both plants are meant for overseas markets. Both plants are expected to come on stream by mid-2007. 

As for our subsidiaries, QSR & KFC, future expansion will be very much domestic-driven, as there are still untapped markets to be explored.  

With regard to our oleochemical business, much of its profitability is overseas driven since about 80% of our client base is from abroad. For 2007, we aim to improve profit margins, both through operational effectiveness and new niche markets. 


What are the economic prospects for the countries where Kulim has a presence in? 

Contrary to the fears of many, PNG’s political and economic condition has been stable. PNG’s GDP is forecast to grow between 3% and 4% per year and its currency is gradually strengthening. 

Additionally, we have strong local support whereby much of the local population is economically well-off, supported by income from palm oil, either from their own plots or as landowners; or as traders, suppliers and plantation workers. Palm oil has been a major economic contributor to PNG and is set to continue in years to come.  

Indonesia is also making great strides economically and politically. In a few years, the country’s palm oil production is expected to exceed that of Malaysia.  

This is due to the government economic policy, which is highly supportive of agriculture, and palm oil specifically. In addition, Indonesia appears to be ahead of PNG in terms of biodiesel initiatives. 

What are some of the interesting lessons and observations gleaned from your venture overseas?  

We have no regrets going overseas. Our PNG investment has paid for itself while our Indonesian plantations would be contributing significantly to group results in the future. We also expect the investment in Solomon Islands to be another winner. Apart from having similar growing conditions as PNG, the staple-shares arrangement that we made with the Solomon government allows Kulim to benefit directly from dividends from the plantations there. 

It is obvious that business culture specific to countries is of paramount importance when evaluating whether to invest in any foreign country. It is also critical to match the perceived business potential against our own risk tolerance level to ensure that any failure, if it happens, will be within manageable limits. That said, we look forward to expanding our overseas holdings. 


There is apparently feedback from fund managers that only a few Malaysian companies venturing overseas are getting a premium from investors. Do you see the need for these companies to step up their profile or do something to improve their premium?  

Drawing from Kulim’s own experience, profile building either through mass media (general audience) or to selected investor groups through direct briefing and information sharing has been beneficial.  

The investing public, for one, would not have the time and access to important information on any company’s overseas operations. As such, the value that these operations bring to the company is not readily known. This, in turn, affects the valuation and premium that the company/group commands. 

NBPOL is a case in point. However, with Kulim's effective profiling strategies and various programmes, we are seeing the company’s valuation moving closer to our expectation. 

Regardless, the fundamental factors such as consistent performance and strong corporate governance would still be the main driving force for companies, as far as valuations and premiums are concerned.  

While effective relations programmes, including profiling exercises, will make you visible to investors, to continue being there, you will need to consistently deliver. That is what we at Kulim are aiming and striving for. 


RAJAH KUMAR, Chairman & CEO Philips Group of Companies, Malaysia 

Rajah Kumar

HOW has the consumer market been in 2006? 

Perspectives on consumer markets could vary depending on the consumer segments addressed by firms. In Philips, we have been focusing on healthcare and lifestyle portfolio and find our markets have been quite active and growing in Malaysia.  

For example, consumer health and wellness is slowly pushing the borders between professional and domestic products to blur. Philips is actively looking at opportunities to engage consumers in this space for infrared light in pain relief to provide them with a combination of light sources for indoor tan. 

We continue to enhance the quality of life of our consumers with efficient lighting solutions in domestic and professional applications. Philips has been supplying even defibrillators that were traditionally used in hospitals for home use to treat sudden cardiac arrest.  

It is all about creating new space, knowing consumer’s obvious and latent needs.  


What are the consumer trends nowadays? 

Improving peoples' quality of life with meaningful technological solutions is our mission and, when it comes to quality of lifestyle, consumers in Malaysia are no exceptions to keep improving their living standards.  

Consumers rightfully continue to get more educated and sophisticated and seek the best value for money. They are not just looking at buying cheaper goods but good brands that can satisfy their needs and give them an attractive cost of ownership.  

The initial purchase price could be low for a brand but, if the overall cost of maintaining the product during its lifecycle in terms of maintenance, and power consumption is high, it makes sense to invest in a higher cost product that gives lower cost of ownership.  

With utilities and fuel prices bound to increase, consumers are aware of the need for green products. For Philips, sustainability is in our DNA and we spend billions of dollars in research and development (R&D) to accelerate the launching of hundreds of new green products.  

Malaysians demand better quality products at competitive prices. This customer requirement drives our ability to design products around our consumers’ needs and at the same time, making the product simple to use and easy to experience. This is reflected in our brand promise - Sense and Simplicity.  

What are the challenges you face in getting more sales? 

The challenges - consumers are rightfully becoming more demanding and looking value for money.  

Firms may view this as a challenge or opportunity and, for Philips, this is more of an opportunity to address. We do invest billions of dollars in R&D and we need to get the return on investment to be economically viable. This is where the cost of ownership proposition plays a crucial role. We need to further emphasise this differentiating factor.  

The other two bottomlines, apart from the economic bottomline, are environmental and social. We look at this as one solution and strongly believe that no longer can businesses exist in isolation. 

For Philips in Malaysia, we have been registering healthy growth in all areas of our businesses, which include medical systems, consumer electronics, domestic appliances, lighting, semiconductors and set-top boxes.  

We continue to work with our partners and business associates to cover all the markets in Malaysia. Our state-of-the-art introductions in healthcare, lifestyle and technology will continue to satisfy the needs of Malaysian consumers and create this growth and sustainable position for Philips in this interesting market. 


Which market segment in your priority? Are you going for new segment?  

All our product offerings and the market we serve are priorities for us. We have created niches for ourselves in the healthcare and lifestyle businesses and, because of the expertise and knowledge in the interface of these segments, we find opportunities for consumer health and wellness range of products.  

We will continue to focus on these new areas and use our strengths in display, storage and connectivity to further launch more solutions for B2B (business-to-business) and B2C (business-to-consumer) segments. 


What do people look for these days - bargains, gifts, discounts, membership or holiday? Why is this happening? 

Consumers do look for the above because they know what is at their disposal and how important they have become as a stakeholder.  

In other words, they are looking at value proposition and, if they can combine this with the cost of ownership and energy-saving aspects, not only can they benefit out of their buys but so will the society and the eco-system.

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