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.