KL plantation firms look to Indonesia for expansion

KL plantation firms look to Indonesia for expansion

KUALA LUMPUR (Dow Jones): Rising production costs and the
limited availability of land are forcing Malaysian oil palm
plantation companies to look to Indonesia for expansion, planters
and industry officials say.

Although Indonesia's political and social tensions have lead
to a slowdown in fresh investment, its problems are temporary and
are likely to be overlooked by long-term investors, they say.

"Investments (in the plantation sector) will continue to
increase in Indonesia. There may be problems now, but the
situation will normalize sooner than many think," said Mahbob Bin
Abdullah, director in the plantations division of Sime Darby Bhd.

"The (Malaysian) industry must be prepared to move overseas in
the near future, while concentrating at home for the time being,"
as land availability in Malaysia declines, said John K.
Kuruvilla, executive director of Agro Hope Sdn. Bhd, which
operates plantations in both countries. Agro Hope is a unit of
Sri Lanka's Carson Cumberbatch & Co.

According to Jerneh Asia Bhd. Chairman Khor Chin Poey,
Malaysia's "future position as the leading producer of palm oil
is very much dependent on what happens in Indonesia. Given the
natural resources in terms of land and available labor, Indonesia
can easily overtake Malaysia as the world's largest producer."

However, Khor said the small local demand in Malaysia against
the 200 million people in Indonesia, who use palm oil for cooking
and other purposes, may still allow Malaysia to be the leading
exporter for a while to come.

"In planning new investments in the palm oil sector (in
Malaysia), investors must be mindful of the higher project
development cost, acute shortage of labor and increasing
production cost.

As a medium-term strategy for survival, one may have to look
to investing in a lower cost producing country such as Indonesia,
(although) operating in a foreign country is never easy," Khor
said.

"Malaysia can hold its own as the leading producer of palm
oil, but the country with the real potential (will) surely be
Indonesia," Khor said.

At the same time, Indonesia is encouraging foreign investment
in the plantation sector by granting foreign capital investor
status even to companies relocating their operations there.

The initiatives are slowly paying off. On Friday, the
Singapore government's investment arm, Temasek Holdings Pte. Ltd.
said it would invest in Indonesia's palm oil sector by teaming up
with two leading palm oil companies - Indonesia's Golden Agri-
Resources Ltd. and U.S.-based Cargill Inc. - to develop oil palm
plantations in Indonesia.

According to Malaysian government estimates, more than 10
percent of Malaysian plantation companies have already developed
oil palm plantations in Indonesia and many more are expected to
follow suit.

While strengthening their position within Malaysia by cutting
operating costs, plantation companies will have to plan for
relocation of their production activities and any future
expansion to countries such as Indonesia, which has a comparative
cost advantage, Kuruvilla said.

"The prices of land (in Malaysia) have increased significantly
and current high prices around $9,000 per hectare are considered
too expensive for plantation development," he said. Malaysia also
lacks trained plantation workers - indeed, most of its existing
labor force is already from Indonesia.

The increased interest in Indonesia isn't without problems
though. For example, despite the official stand of the Indonesian
government, Malaysian companies still find it difficult to get
the necessary clearance at various other levels of the
government, an official in the Primary Industries Ministry said.

"The central government (in Indonesia) may give the go ahead.
But, when it comes to the provincial governments, they still
delay the permits or even refuse at times," said the official,
who asked not to be named.