Archive for September 2012

Budget boon for smallholders

This is written by my colleague Koi Kye Lee.

PUTRAJAYA: THE RM432 million allocation for independent smallholders to embark on new plantings and replanting of their unproductive oil palm trees will have a big impact on the palm oil industry.

Deputy Plantation Industries and Commodities Minister Datuk Hamzah Zainuddin said the allocation would help generate and transform the palm oil industry, which is divided into upstream and downstream activities.

"With this allocation, the ministry will be able to use it to strategise and raise palm oil yield," he said after flagging off the ministry's Walk for Health event yesterday which saw the participation of some 7,000 people.

Hamzah said the price of the commodity in the global market had seen a slight decline due to several factors.

"One of the reasons is the slow economic growth in Europe, while in America, soy production and demand for soy oil has increased, causing a drop in the demand for palm oil.

"However, the demand for cooking oil will see an increase towards the year-end because of the festive celebrations, especially Deepavali and Christmas. So, these will be the push factors for increasing palm oil prices in the market."

During the tabling of the 2013 Budget on Friday, Prime Minister Datuk Seri Najib Razak had proposed a RM432 million allocation for independent smallholders to embark on new plantings and replanting of their unproductive palm trees.

The allocation under the Budget works out to be RM7,500 a hectare for oil palm land in Peninsular Malaysia and RM9,000 a hectare in Sabah and Sarawak. According to the Malaysian Palm Oil Board, there are around 170,000 independent smallholders in Malaysia. With 700,000ha, they account for 14 per cent of the country's five million hectares of oil palm land.

This government subsidy to help smallholders to replant is meant to raise the annual national oil yield, which has been stagnating at below four tonnes a hectare over the last two decades. It is hoped that by 2020, the annual fresh fruit bunch yield would improve to 26.2 tonnes a hectare from 21 tonnes currently. 

The RM432 million allocation is expected to benefit some 170,000 independent smallholders in the country and those who own 40ha or less are eligible for the replanting grant.

As for new plantings, the incentive can only be accorded to those who own up to 5ha in Peninsular Malaysia and a maximum of 7ha for those in Sabah and Sarawak.

The 2013 Budget also proposes RM127 million allocation for the development of high-value oleochemical derivatives to transform the downstream industry towards higher production of value added detergent, lubricants and bio-plastics. Basically, this is a continuation of the government's commitment to incentivise integrated plantation firms to move further downstream.

Cooking oil is a price-controlled item. In order to cap retail price at RM2.50 a kg, the government is maintaining its annual subsidy for this staple cooking ingredient at RM1.5 billion.

Southern Acids strikes cautiously optimistic note

SUBANG JAYA: Southern Acids (M) Bhd is cautiously optimistic of its business prospects as its oil palm estates in Indonesia and oleochemical operations in Malaysia suffer from the impact of Indonesia's palm oil tax restructure.

Since August 2011, the Indonesian government has raised palm oil export taxes drastically to boost refining capacity and downstream activities there.

"With cheaper feedstock available to Indonesia's oleochemical producers, the playing field is no longer level," said chairman Tan Sri Low Boon Eng.

"Our oleochemical manufacturing business here suffered substantial margin erosion," he said after the company's shareholders' meeting here yesterday.

Southern Acids operates a 100,000-tonne-a-year oleochemical plant in Kapar, Klang. Its products are mainly exported to Europe, East Asia and South Asia.

Last month, the Palm Oil Refiners Association of Malaysia (Poram) highlighted that the Malaysian government, in allowing five million tonnes of duty-free crude palm oil exports and remaining indifferent towards the plight of palm oil refiners here, had risked the loss of further investment and talent in its oleochemical, specialty fats and biodiesel sectors.

Poram said the government's indecision for the past 12 months had eroded investors' confidence to further value add Malaysia's palm oil downstream sector. This also meant opportunity loss in retaining and attracting highly-skilled knowledge workers.

Low concurred with Poram that the government needs to take a more discerning approach. "The government must do something about the current situation. It has been more than a year already," he said.

Southern Acids, via PT Mustika Agro Sari and PT Wanasari Nusantara, has 7,870ha of oil palm plantations in Indonesia.

Low noted the Indonesia's palm oil tax restructure, in encouraging downstream investment there, had pulled down palm oil prices. "So, our oil palm plantation and milling business had to contend with lower selling prices," he said.

Despite operating in challenging circumstances caused by the restructure of Indonesian palm oil taxes, Low said the group is cautiously optimistic of remaining profitable in the current year ending March 2013. "We'll continue to focus on our Indonesian operations. So far, we've planted up around 4,700ha. We'll continue to embark on new planting and replanting in Riau," he said.

Palm oil prices sizeably undervalued, says Mielke

Mumbai, INDIA: (Bloomberg) PALM oil prices are "sizeably undervalued" in comparison with soyaoil and the discount is unlikely to be sustained as lower prices will prompt importers to buy more palm oil, a top world oils analyst said yesterday.

"Palm oil is offered at discounts of more than US$250 (per tonne) under soyabean oil. I think this is not sustainable. We are going to see world import demand to shift to the more effectively priced palm oil," said Thomas Mielke, editor of Hamburg-based newsletter Oil World.

The increased demand will help the world's top two palm oil producers - Indonesia and Malaysia - raise exports and trim inventory that has been depressing palm oil prices, Mielke said in his video presentation to the Globoil India conference here.

On Friday, benchmark palm oil futures on Bursa Malaysia Derivatives lost 2 per cent to close at RM2,763 a tonne, after hitting an 11-month low of RM2,755 earlier in the day.

World production of palm oil is likely to rise to a record high of 54.4 million tonnes in 2013 from 51.6 million tonnes estimated for 2012, Mielke added. Output could rise to 78 million tonnes in 2020 as higher profitability is bringing in additional plantation, he said.

Global output of sunflower oil in the 2012/13 year starting from October 1 is likely to fall by 1.2 million tonnes, and that should give it a price premium over rival soyaoil in the second half of the year, Mielke said.

CBOT soyabean futures hit an all-time high of US$17.94-3/4 a bushel this month, but have since fallen nearly seven per cent as farmers in the US hastened harvesting of their new season crop. However, that crop is likely to be used up quickly due to higher prices and that will again create tight supplies, allowing prices to resume their rally, Mielke said, without giving any time frame.

"Soyabean prices will resume their rally, exceeding US$18 a bushel, probably rising to US$19 or US$20 or above if any problems occur in South America," he said. Sowing has been progressing in South America, where output was hit by a severe drought last year.

CBOT November soyabeans finished 0.2 per cent higher at US$16.21-3/4 a bushel on Friday.
However, Dorab Mistry, director at Godrej International Ltd, said palm oil, the world's most-used cooking oil, is poised to tumble to a two-year low as inventories surge in Indonesia and Malaysia, the biggest producers, and a global economic slowdown curbs demand.

Palm oil, used in everything from chocolate to detergent, has fallen 8.5 per cent this month as demand slowed from importers including China and the EU, and stockpiles surged because of a seasonal increase in production. Falling prices may reduce revenues for producers including Sime Darby Bhd and IOI Corp Bhd and help cap rises in global food costs.

"Demand for palm oil in particular, and for vegetable oils in general has been softer than expected in 2012," said Mistry, who has traded palm oil for over three decades. Demand was hurt by slower growth in the production of biofuels from vegetable oils and a slowdown in economic growth in the developing countries amid high prices, he said.

Futures have fallen 20 per cent since the end of March and are heading for a second straight quarterly decline on concern that a pick-up in production will drive stockpiles in Malaysia and Indonesia to records.

Stockpiles in Malaysia will continue to expand in October, November and December and may reach as high as three million tonnes by January, Mistry said.

Inventories in Indonesia have hovered between 3.5 million tonnes and four million tonnes since 2010 as against popular estimates of 1.5 million tonnes to two million tonnes, he said.

She's got really soft fingers

Today, Bank Negara organised a media workshop to better engage with business journalists. I was among the 30-odd reporters and editors who had lunch with the central bank governor Tan Sri Zeti Aziz.

Yes, this is the lady whose signature is the most recognised in the country. Her signature is inked on every Ringgit Malaysia currency note from RM1, RM2, RM5, RM10, RM20, RM50 to RM100.

Since 16th July 2012, Bank Negara issued a new series of banknotes. I asked the governor why Bank Negara had kept the oil palm tree motif on the back of the RM50 note since August 2007. She replied that it is distinctively Malaysia and draws inspiration from nature. She also said that the palm oil industry plays an important role in our economy and that quite a few plantation companies are among the Top 20 heavyweights on the stock exchange.

When Zeti was informed that many oil palm planters and Felda settlers are very happy that Bank Negara had kept the oil palm tree motif on the back of the RM50 note, she smiled and nodded.  "I'll bear that in mind."

When it is time to say goodbye, I shook hands with her. I must say ... for an 'Iron Lady' who has a tight grip on our economy, she's got really soft fingers.

TH Plantations to issue RM1.5b sukuk

KUALA LUMPUR: Oil palm planter TH Plantations Bhd, a 59.08 per cent subsidiary of Malaysia's pilgrims fund Tabung Haji, plans to issue a RM1.5 billion Islamic bond with a tenure of 15 years. 

Hong Leong Islamic Bank Bhd and RHB Investment Bank Bhd have been appointed as the joint runners for the sukuk Murabahah facility, TH Plantations said in announcement yesterday. 

It told the stock market that the bonds would not be rated. Funds raised from the exercise will go towards redeeming TH Plantation's commodity term financing facilities, financing capital expenditure needs and other corporate expenses.

TH Plantations saw its net profit drop 39 per cent in the first half of the year due to lower production and lower selling prices for crude palm oil (CPO), in line with the lower year-on-year results reported by most plantation companies.

The company recently issued new shares to raise RM536 million to finance an acquisition that would double its land bank. --Reuters

Indonesia's palm oil exports to stay flat

KUALA LUMPUR: Indonesia's palm oil exports are likely to stay flat like last year's 17.6 million tonnes due to lacklustre economic growth in Europe and the US curb on demand for cooking oil, said Gabungan Pengusaha Kelapa Sawit Indonesia (GAPKI) executive director Dr Fadhil Hasan.

On the bright side, Fadhil said China remains Indonesia's third biggest palm oil buyer. "Shipments in the first half of the year accounted for only 45 per cent of Indonesia's exports. But demand will usually pick up in the second half because there are more festivities and religious events that spur more preparation of fat-laden foods like cookies, chocolate, ice cream and cakes," he said.

Fadhil was speaking on the sidelines of the Oils and Fats International Congress (OFIC) 2012 held here recently. 

Organised by the Malaysian Oil Scientists' and Technologists' Association (Mosta) and the Malaysian Palm Oil Board (MPOB), the congress carried the theme "Future of Oils and Fats - Is Smart Partnership the Way Forward?"

Yesterday, the third-month benchmark palm oil prices on the Malaysian Derivatives Exchange traded RM18 lower to close at RM2,912 per tonne.

LMC International chairman Dr James Fry, in presenting his forecast on vegetable oils at the conference, reiterated his long-held view that palm oil prices will continue to be highly influenced by petroleum prices. 

"In the first quarter of 2013, palm oil prices could fall further to RM2,450 per tonne if Brent crude dropped to US$80 a barrel," he said.

"Higher output from the Organisation of Petroleum Exporting Countries, which accounts for one-third of the world's oil production, and the worsening of the eurozone debt crisis, could continue to be a drag on Brent crude prices," he said.

On Malaysia's palm oil output, Fry sees a 3 per cent dip to 18.3 million tonnes this year because of "the legacy of dry conditions in the previous year".

Palm oil prices likely to hit RM3,200 by year-end

PUTRAJAYA: PALM oil prices are likely to climb back to RM3,200 a tonne by year-end, said Jupiter Securities chief market strategist Benny Lee Wan Yu.

Yesterday, the third-month benchmark palm oil futures on the Malaysian Derivatives Exchange traded RM10 higher to close at RM2,937 a tonne.

"Palm oil prices are more or less going to trade rangebound between RM2,900 and RM3,000 a tonne in the immediate weeks. 

"Chartwise, palm oil prices seemed to have bottomed out at RM2,820 a tonne," he said.

"So far, palm oil is one of the commodities that has not moved up. Gold, petroleum and soyabean have all gone up. 

Currently, the trading pattern is very much like that in 2010. Back then, prices went as high as RM3,900 a tonne towards the end of the year," he said.

However, Lee said this time, prices are not likely to trade as high because of high inventories. 

"We see the prices reversing into an uptrend, going as high as RM3,200 by year end and peaking at RM3,400 a tonne in the first quarter of 2013," he added.

Lee was speaking on the sidelines of the International Palm Oil Sustainability Conference 2012 held here yesterday. 

Also present at the conference was Malaysian Palm Oil Council chairman Datuk Lee Yeow Chor.

Cargo surveyor Intertek Agri Services put September 1 to September 10 exports at 453,302 tonnes, an increase of 27 per cent. Another surveyor, SGS, puts exports at 460,939 tonnes, up 30 per cent. 

In the first 10 days of this month, crude palm oil exports jumped more than twofolds to 167,663 tonnes. The surveyors' report said the surge is a result of the government's recent decision to allow another two million tonnes of tax-free crude palm oil to be exported. 

Lee concurred with the cargo surveyors' findings that palm oil export volume is doing well. 

"We expect shipment to pick up in the coming months. There's strong demand for palm oil from India and Africa," he said.

When asked on price outlook, Lee replied: "Palm oil is still trading at a wide discount to soya oil of more than US$200 (RM620) a tonne. This price differential has prompted demand for more palm oil and in time, prices should start to rise again."

Versatile oil in a thriving industry

This is written by Bilqis Bahari and Ooi Tee Ching.

KUALA LUMPUR: PALM oil is very much in the food we eat, the cosmetics we wear and the detergents we use to launder our clothes.

When Business Times met up with Malaysian Oil Scientists' and Technologists' Association (MOSTA) president Tan Sri Augustine Ong recently, he asked, "Do you know that one in 10 working Malaysians are dependent or are in a job that deals with the palm oil industry?"

Many assume that the palm oil industry is just confined to farmers. But it is more than that, he said. Bankers, insurance companies, freight forwarders, cargo surveyors, scientists and engineers are also part of the palm oil supply chain.

Today, Malaysia's sprawling palm oil industry is employing more talents. The sector entails production of margarine, cooking oil, oleochemicals, transport and storage of palm oil at the ports, palm oil futures trading at brokerages, design and building of refineries and biodiesel plants, animal feeds, vitamin E extraction and even the development of nutrient-enriched cosmetics.

To extract palm oil, Ong explained, the fruit of the palm tree is collected and pressed, yielding a rich, dark-red oil. From there, about 90 per cent of the oil is processed into cooking oil, margarine, chocolate, candy and ice cream.

There are two types of oils that are derived from the palm fruit: Palm oil (which can be in semi-solid form) and palm kernel oil (which is extracted from the fruit kernel). 

In palm oil, the liquid portion is called palm olein where it is mostly used as cooking oil. The solid portion, which is known as palm stearin, is a source of natural fat component in shortenings and margarine.

"There are 17 kinds of oils in this world. Palm oil is the most consumed, while competing oil crops grown in cold countries are soyabean, rapeseed and sunflower," he told Business Times in an interview here recently.

He added that about 55 per cent of people in the world use liquid oil as their main cooking ingredient, whereas the remaining 45 per cent prefer solid fat like butter and ghee. 

"What is interesting about palm oil is that it provides both liquid oil and solid fat," he said. "The benefit of using palm oil in food preparation is that it extends the shelf life of the product and is rich in vitamins," Ong said.

He explained that unlike the limited vitamin E range in soft oils extracted from soyabean, rapeseed and sunflower, tropical palm oil vitamin E contains tocotrienols which have cholesterol-lowering and anti-cancer properties. 

In view of such life-saving attributes, Ong said, medical researchers all over the world are carrying out clinical trials on the usage of palm oil vitamin E in the prevention of degenerative diseases such as cancer and stroke. 

"Indeed, palm oil is nature's gift to Malaysia and Malaysia's gift to the world," he added.

Last year, Malaysia reaped RM80 billion in foreign earnings from palm oil exports. 

Besides income from exports, the economic significance of palm oil is also seen from nearly a million people directly employed in the estates and another million consider their livelihoods dependent on this industry.

In a separate interview, KL-Kepong Oleochemical managing director A. K. Yeow concurred with Ong on palm oil's versatility, saying about 10 per cent of its usage goes to the manufacture of oleochemicals.

Oleochemicals are essentially derived from animal and plant fats through the process of fat splitting. 

When palm oil is hydrolysed into basic oleochemicals like fatty acids and glycerine, the fatty acids can be further processed into methyl esters and fatty alcohols. These are then processed to make soap, detergent intermediates, cosmetics and even infant formula, he said.

Yeow said many detergent and soap manufacturers choose the slightly expensive oleochemical over petrochemicals because it is sourced from palm kernel oil, a renewable feedstock.

On the global outlook for oleochemicals, he said demand is on the uptrend as rising living standards in emerging economies like China and India prompt more consumption of soaps, detergents and cosmetics.

In giving a bird's eye view of the industry, Yeow said sectors like logistics, insurance and banking are part of the palm oil supply chain. "You would need people to transport palm oil from the mill to the refinery. When the volume is so big, you'll need lorry tankers and ships. There are also bulking and storage tanks at the jetties."

"When you transport the oil from the estate to the seaport, you will need to make sure it gets there safe. This is where the insurance comes in. Apart from that, some people might not have enough cash, that is where bank loans come in," he said. 

Since 2010, stock exchange regulator Bursa Malaysia Bhd has set up Bursa Suq Al-Sila for banks to buy and sell crude palm oil futures to facilitate Islamic finance. 

The transactions on Bursa Suq Al-Sila involves an Islamic bank buying crude palm oil from the spot market and then sells it to the borrower. The borrower then sells the crude palm oil to a third party in the spot market for cash, using the bank as its agent, thus securing the financing.

Malaysia, the world's biggest Islamic bond market, is embarking on more than US$400 billion (RM1.25 billion) decade-long economic development. The government and the private sector leverage on palm oil as the underlying commodity in Islamic finance.

Kuala Lumpur Kepong Bhd (KLK) recently sold RM1 billion of 10-year Islamic bonds. Sime Darby Bhd is planning its first multi-currency Islamic bond programme of as much as US$1.5 billion to raise funds for capital expenditure.

It is anticipated that this year, sales of corporate Islamic bonds that pay returns on assets instead of interest, are approaching a record high. As of to-date, issuance of the islamic financing instrument rose 41 per cent or RM43.2 billion from last year's RM75.6 billion.

"So, as you can see, the palm oil industry is not just about planting oil palms. There're a whole lot of other business activities coming together to make this a thriving industry," Yeow noted.

Indonesia ready to fight EU claim

KUALA LUMPUR: INDONESIA is ready to fight a complaint by European biodiesel producers of dumping in the European market, if necessary, but will first ask EU regulators to clarify their allegations, trade ministry officials said yesterday.

European producers have lodged a formal complaint that millions of tonnes of Argentine and Indonesian biodiesel are being dumped on the European Union market.

"We have informed all biodiesel exporters about the case and we have asked them to be cooperative and answer all the questions proposed by EU Commission," said Deddy Saleh, director general of foreign trade at the trade ministry.

"We have questioned the EU allegation and have asked them to clarify the reasons for it," he added. "We will fight the allegation if the reasons are not reasonable."

The head of the European Biodiesel Board (EBB), which represents 75 producers and nearly 80 per cent of European biofuels output, on Thursday said the body was also "actively working" on getting EU emergency procedures imposed.

The EBB said the EU had experienced a surge in Argentine and Indonesian imports, leading to several bankruptcies, forcing European producers to sell below cost and to cut annual production.

From very low levels in 2008, imports from the two countries progressively rose to around 2.5 million tonnes in 2011, or more than 90 per cent of imports into the EU, according to Eurostat and EBB estimates.

"Prices of soyabeans, the raw material, are more expensive in Europe than biodiesel imported from Indonesia and Argentina," Raffaello Garofalo, EEB secretary general, said on Thursday. "It's like saying steel costs more than a car. It's impossible to compete."

The EBB, citing market sources, said Argentine and Indonesian imports have been sold for between US$60 and US$110 (RM188 and RM344) less than the EU biodiesel, while soyabean oil had sold for around US$100 a tonne more than imported soyabean-based biodiesel.

The European Commission announced in its Official Journal the complaint that Argentinian and Indonesian biodiesel was being sold very cheaply and "thereby causing material injury to the Union industry."

Palm oil output from Indonesia, the world's top producer, is expected this year to be between 23 million and 25 million tonnes, compared with 22.5 million in 2011.

Lower export taxes for palm-based biofuel have spurred Indonesian firms to turn palm oil into the renewable fuel and corner the European market.

The Association of Indonesian Biofuel Producers said there were 24 Indonesian companies named in the European complaint sent to the Indonesian government.

Of the 24 companies, many had already stopped operations, while others only produced biodiesel for domestic consumption or for export markets other than the EU, said APROBI secretary general Paulus Tjakrawan. "All the companies on the list will make clarifications to EU on these allegations," he said.

According to Reuters calculations, Indonesia shipped out 679,274 tonnes of palm-based biodiesel last year, compared with 244,418 tonnes in 2010. From January to July this year, the figure was about 400,000 tonnes.

Most of Indonesia's biodiesel is palm-oil based and about 90 per cent of exports go to Europe, with Spain and Italy the top buyers. ---Reuters

Sime Darby plans US$1.5b Islamic bond

KUALA LUMPUR: Sime Darby Bhd, the world’s biggest listed palm-oil producer, is planning its first multi-currency Islamic bond program of as much as US$1.5 billion in Malaysia to raise funds for capital expenditure.

“We are having ongoing discussions with bankers,” Tong Poh Keow, the group chief financial officer, said in an interview in Kuala Lumpur recently. “The first issuance will likely be in dollars.”

The conglomerate, which also has interests in industries ranging from property to heavy machinery in more than 20 countries, has total debt of RM3.3 billion (US$1.1 billion), according to data compiled by Bloomberg.

The company plans to increase capital expenditure by 23 per cent to RM7.75 billion in the current fiscal year ending June 30, 2013, chief executive officer Mohd Bakke Salleh told reporters in the capital yesterday, after releasing earnings results.

Sime joins Malaysia’s Axiata Group Bhd in seeking to tap funds in the US$1.3 trillion global Islamic finance industry. The Kuala Lumpur-based telecommunications company announced, last month, that it received regulatory approval to start a similar-sized multi-currency sukuk program.

Sales of corporate Islamic bonds in Malaysia, the biggest market for the debt that pays returns on assets instead of interest, are approaching a record in 2012. Issuance rose 41 per cent to RM43.2 billion from a year earlier, compared with the all-time high of RM75.6 billion last year, according to data compiled by Bloomberg.

The Bloomberg Malaysian Sukuk Ex-MYR Index, which tracks non-ringgit denominated sukuk listed in the Southeast Asian nation, gained 4.8 per cent this year to 109.396, after climbing 5.9 per cent in 2011. -- Bloomberg