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Tan Sri Lee Shing Cheng |
Executive Chairman
IOI Corp Bhd
YOUR views on the escalating risks in the plantation sector’s crucial growth parameters such as the scope of expanding oil palm areas, control of harvesting costs and maintaining high yields?
The most challenging factor for growth would be finding suitable land to cultivate. First, land prices have escalated. Second, not all agronomically-plantable land is suitable in today’s context.
We are all concerned about the environment and the impact businesses have on the environment. We need to ensure that business is conducted under sustainable business models. In the case of palm oil, the cultivation of oil palm should be in accordance with sustainability principles and criteria as prescribed by Roundtable of Sustainable Palm Oil, of which IOI is a founding member.
Among other things, this means for instance, that virgin forest or areas with “high conservation value” or peat areas more than 2m deep, should not be touched.
On the cost front, the most serious area of cost increases is fertilisers. Five years ago, we used to spend about RM800 per hectare per annum on fertilisers. Today, the amount has almost doubled and it's still going up. Fortunately, the strengthening ringgit has mitigated the increase.
As for maintaining high yields, we hope to not only maintain but to further improve as well. Oil yields per hectare can be further improved both in terms of FFB yield as well as extraction rates at the mills.
How do you foresee the 2008 growth outlook for biofuel/biodiesel industry in Malaysia amid the international trade limitations, higher feedstock (CPO) prices, sustainability and the food versus fuel debate?
The growth of the biofuel/biodiesel industry is mainly driven by Europe and the US. For these regions, the main consideration is energy security and therefore, governments are backing the development of the bio-energy sector either in the form of subsidies or mandated use.
There are clear targets in these countries and hence the growth trend is expected to continue. Besides, for the developed countries, food prices is not such a big issue. For poorer nations in Asia and Africa, escalating food prices is a serious concern.
In Malaysia, cooking oil is a price-controlled item and the bigger producers are required to contribute to a cooking oil cess. Hence, since we even have to subsidise cooking oil, we will not be ready for the biodiesel industry to take off in Malaysia as yet.
Globally, the amount of palm oil that is used for bio-energy is very low (less than 5%). Palm oil will continue to face obstacles as a feedstock for bio-energy in places like Europe.
However, despite all these, we see palm oil demand and palm oil prices going up. This is because as more rapeseed oil, soy oil and corn gets diverted to the bio-energy sector, more palm oil is needed to fill up the shortfall in the food and other sectors.
I see the food versus fuel debate continuing. Unfortunately, the world is hungry for both food and fuel. But as I said, actually, very little of palm oil goes to fuel at the moment.
Do you agree that the structural changes in the global commodities supply and demand pattern i.e. the biodiesel market, the fight for hectarage to plant corn for ethanol instead of soy bean and rapeseed in the US and South America, trans-fatty acid concerns, China and India relaxing their palm oil import tariffs, will lend support to higher CPO prices in 2008?
Prices of soft commodities in general are expected to remain high. In the case of vegetable oil, supply over the next 12 months, with the notable exception of palm oil, is expected to lag behind consumption again.
Hence, prices of soy oil, rapeseed oil and sunflower oil will remain high and will even go higher if projected production is cut by unfavourable weather.
Palm oil production growth, on the other hand, will be above average but this is not a bearish sign because its surplus supply is needed to make up for the deficits in the other oil.
Overall, for 2008, palm oil prices will follow the lead of other vegetable oil which prices are expected to be high.
Your company’s strategies in 2008 and the rationale behind it, i.e. overseas expansion, refineries, mills, biomass, biodiesel projects or carbon credit initiatives.
We are bullish about the long-term prospects of palm oil and will continue to invest at the appropriate time and in an appropriate manner to grow the business, both upstream and downstream.
We recently entered into a joint venture (JV) to invest in oil palm cultivation in Indonesia. Our effective interest in the JV is equivalent to about 70,000ha, which is nearly 50% increase to current planted hectarage in Malaysia. It is, therefore, a very significant addition and this will likely be the main area of focus in 2008 for the upstream sector.
We will also further invest in downstream operations in Malaysia as well as Europe and the US over the next two years to capture demand, further value add and innovate on the use of our palm oil fractions.
Also, not forgetting that we have a sizeable property business that should also see decent growth as the market is improving.
The current volatile CPO prices from RM2,900 to RM3,000 per ton have made it very difficult for planters to lock in their CPO selling prices. At what price would your company be “comfortable” with for FY2008 and FY2009? Kindly indicate your average cost of production annually.
We are “comfortable” with the current price levels but will not be aggressive on forward sales, as there are upside risks. Our production cost is about RM550 per tonne. However, cost of sales, after factoring in transport costs, Sabah sales tax and cooking oil cess, is about RM950 per tonne.
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