Kulim Managing director Ahamad Mohamad talks to (i)StarBizon how the group will face the decline in CPO prices
STARBIZ: How does Kulim plan to maintain its profitability for the rest of 2008, given the current decline in crude palm oil (CPO) prices?
Ahamad: Kulim recognised the risks of the plantation business being exposed to uncontrollable fluctuations of palm product prices and some cost factors.
This has driven us to build and refine our business model to naturally mitigate the impacts of such economic and market vagaries.
We also have other operations to cushion the impact of the weakening CPO prices.
The prospects of our 91%-owned Natural Oleochemicals Sdn Bhd (NatOleo) remain robust and the company is set to deliver a reasonable margin, helped by lower feed stock costs, which makes up some 85% of NatOleo’s production costs.
The lower CPO prices helped to support the viability of our biodiesel operations.
Our food and restaurant division is also becoming instrumental in the drive for future growth.
More importantly, we are addressing this impact within our plantation business itself. Apart from the normal cost-saving measures, we are enhancing efforts to ensure that fresh fruit bunches (FFB) yields and palm product extraction rates continue to improve.
The cost in absolute terms may increase, but with increased productivity, the net effect would be a competitive unit costs coupled with increased revenue.
StarBiz: What are some of Kulim’s plans in the pipeline aimed at maintaining the company’s competitiveness?
Ahamad: With our plantation business, we strive to enhance our yield and costs competitiveness.
We have in fact successfully passed the Roundtable on Sustainable Palm Oil (RSPO) audit for both our Malaysia and Papua New Guinea plantation operations and are currently waiting for an official RSPO certification. This will take Kulim to another level of competitiveness.
Another important dimension of competitiveness we are pursuing is the continuous business expansion that would yield advantages such as economies of scale, costs savings, versatility and better bargaining power.
StarBiz: Can you give an update on the acquisition of Sindora Bhd and has any synergistic benefits been attained?
Ahamad: Kulim has concluded the acquisition of Sindora on May 27 following the conclusion of mandatory general offer, with Kulim currently holding 75% of Sindora shares. We are pleased that the company has contributed positively to Kulim’s financial results during the first half of 2008.
Sindora contributed 4.8% and 8% of the group’s total local production of FFB and CPO respectively.
As expected, the potential synergy is strongest with our plantation unit as Sindora’s estates and palm oil mills are located near Kulim’s operations.
StarBiz: What are your views on the windfall tax and recent call for a higher CPO threshold price at RM2,500 to RM2,700 per tonne under the new levy?
Ahamad: We agree that the threshold CPO price should at least be RM2,500 to RM2,700 instead of the current stipulated threshold of RM2,000.
While we understand the rationale behind the tax, the Government should also consider the higher cost of production incurred by industry players following the hike in fertiliser and fuel costs. The average cost of production has increased by 60% to 65%.
StarBiz: Is it true that Kulim will be among the first four companies to attain the coveted RSPO certification?
Ahamad: We have strived hard for the past two years to be one of the pioneer receivers of the RSPO certification. This endeavour is almost complete with Kulim now expected to be awarded the certification sometime in 2008.
United Plantations Bhd is the first to get the RSPO certification. The certification is important as it carries worldwide recognition and potentially confers a sustainable and traceable premium on our palm products.
StarBiz: What is your opinion of the CPO price for the rest of 2008?
Ahamad: The range of RM2,400 to RM2,700 per tonne is reasonable, given the current economic climate where crude oil prices have retreated for the past two months.
More importantly, there are bearish fundamental factors in the oils and fats market.
There are projections of higher palm oil ending stocks, lower demand from China, higher global soybean output and the changing dynamics in the politics of biofuels with EU currently looking into a possible reduction of its biofuel transportation usage target from 10% to 4% by 2020.
There is also a legislative move by the US House Agriculture Committee to strengthen the Commodities Futures Trading Commission to limit speculation on commodities.
These developments suggest that the previous sharp rise in CPO prices touching RM4,000 level will not be repeated anytime soon and would be in a sustainable range of about RM2,400.