Indonesia in Joint Ventures with Malaysia, Palm Oil Rival
11/8/97
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Headline: Indonesia in Joint Ventures with Malaysia, Palm Oil Rival
Source: The Financial Times
Date: 11/8/97
Authors: James Kynge and Sander Thoenes
Copyright 1997: The Financial Times Limited
The thick smoke blanketing many parts of south-east Asia
does not obscure fundamental changes taking place in the
world's palm oil industry. In fact, it is evidence of a
new future being forged.
The belief that Malaysia, the world's top producer of
crude palm oil, is losing its competitive edge to
Indonesia, the second-largest producer, has precipitated
a rush by Malaysian plantation companies to put down
roots in their near neighbour.
Some 27 large Malaysian companies had agreed to joint
ventures with Indonesian counterparts by March this
year, when Jakarta shut the door on foreign plantation
investments.
The new joint ventures plan to develop about 1.5m
hectares, compared with a total existing area of oil
palm groves in Indonesia of 2.2m hectares.
The fires billowing smoke from the rainforests of
Sumatra and Kalimantan, the Indonesian part of Borneo
island, were started primarily by Malaysian and
Indonesian plantation companies. The economic incentives
for forest clearing are powerful.
The average cost of producing one tonne of crude palm
oil in Malaysia is roughly US$250 but in Indonesia it is
US$150, plantation analysts say.
Many observers predict Indonesia will supplant Malaysia
- which is beset by shortages of labour and suitable
land - as the world's top producer in the first few
years of next century.
The imperative to plant in Indonesia is hardened by the
fact that several plantation companies have plans for
imminent stock market listings, executives say.
They are keen to convince potential shareholders that an
earnings stream is assured through plantation expansion.
But corporate ambition aside, more ephemeral forces are
at work and have caused a recent surge in crude palm oil
prices to record levels in local currency terms.
The El Nino weather effect, which normally lasts between
12 and 15 months, has already brought drought to some
parts of Indonesia and appears to be the cause of dry
spells in Malaysia.
The dryness has exacerbated the forest fires and looks
set to cut yields from oil palms; female flowers, from
which the fruit grows, tend to blossom less often when
moisture levels fall.
Greg Feldberg, plantations analyst at ABN Amro Hoare
Govett in Kuala Lumpur, forecasts that the lower yields
could persist for a year or two from 1998. The result,
Mr Feldberg says, will be to raise palm oil prices and
plantation company profits.
Indeed, ABN Amro Hoare Govett this week raised its
estimate for the average price of crude palm oil in 1998
from US$500 to US$520 a tonne. Taking into account the
fact that the ringgit, Malaysia's currency, has
depreciated 25 per cent against the US dollar since
July, the predicted US dollar price rise would generate
very attractive returns for local plantation companies.
The pall of smog could also exert a direct influence on
yields. One plantation owner in Indonesia says the
ripening of fruit could be delayed by the smoke blotting
out the sun.