Malaysian palm oil firms struggle to cut costs
Malaysian palm oil firms struggle to cut costs
KUALA LUMPUR (Dow Jones): In the Malaysian palm oil sector, the race is now on for plantation companies to be the leanest and fittest.
With the slump in palm oil prices expected to continue through next year, many are cutting costs to safeguard bottom lines and to remain in the business, industry participants said.
"The plantation sector no more remains a price-maker. We've just become price-takers. The only way to survive now is through cost efficiency," said M.R. Chandran, chief executive of Malaysian Palm Oil Association, a body representing plantation companies.
Sime Darby Bhd., a leading plantation group in Malaysia, recently said its profitability in the current financial year will be affected by low palm oil prices and has announced a cost- cutting program in its plantation business.
Sime Darby declined to be interviewed for this report.
Crude palm oil for December delivery was being offered at 740 ringgit (US$194.75) a metric ton at 0060 GMT, the lowest in seven years.
"At these prices, a lot of companies here don't make money," said B. Bek Nielsen, senior executive director of United Plantations Bhd.
MPOA has forecast crude palm oil prices to rise to MYR900/ton by March next year, but the high stockpile in Malaysia will limit any recovery beyond that.
Cost of production in Malaysia ranged from MYR650/ton to MYR950/ton, said B.C. Shekahar, an agriculture scientist in Malaysia. A more sustainable cost should be around MYR600/ton, he added.
Small holders who contribute around 30 percent to 40 percent of Malaysia's plantation output are cutting down on expensive fertilizers in their plantations.
"That affects yields and will eventually lead to a decline in output," a plantation company executive said.
Agro Hope Bhd., a medium-sized company that has plantations in both Malaysia and Indonesia, has opted for a short-term measure.
"I have asked all maintenance to be put on hold until March," said John K. Kuruvilla, executive director of Agro Hope.
Kuruvilla said this has helped him cut cost by at least MYR50/ton, but cautioned such measures are possible for a period of not more than six months and can only be applied on plantations that are already very well-managed.
Indonesia
"All the big players in the palm oil business are heading towards Indonesia, despite all the problems there, because land and labor are cheap," said Kuruvilla of Agro Hope.
"We can't compete with Indonesia," when it comes to cost of production, Kuruvilla said.
Cost in Indonesia is around MYR450/ton, still far more competitive compared with the lowest cost in Malaysia at MYR650/ton, he said.
"(Investing in Indonesia) is definitely a good way to reduce average costs because both land and labor are cheaper in Indonesia," said Lucy Ng, investment analyst with KAF Seagroatt Bhd.
"Compared to Malaysia, costs are lower by at least 20 percent in Indonesia," she added.
Malaysia's Kumpulan Guthrie Bhd. (P.KUG) recently bought 25 plantations, formerly owned by Indonesia's Salim Group from the Indonesian Bank Restructuring Agency.
Following the $368 million deal, Guthrie now owns more than 300,000 hectares of plantation, up from 108,258 hectares previously.
Announcing the deal, Guthrie said the acquisitions will help it reduce the company's average cost of production. Guthrie didn't say what that cost is. Guthrie declined to be interviewed.
Malaysian palm oil futures rebounded from earlier lows by the close on Tuesday on short covering, traders said.
The benchmark third-month February futures contract ended unchanged at 795 ringgit ($209.21) a ton after trading as low as 778.
Physical December (south) crude palm oil was offered at 740 against bids of 730 and trade at 710 to 725.
Jan (south) was offered at 765 ringgit against bids of 760 and trade at 750 to 760.
Among refined products, December RBD palm oil was offered at $210 a ton FOB and January at $212.50.
There were offers for December RBD palm olein at $220 and January at $222.50.
December RBD palm stearin was offered at $200 and December palm fatty acid distillate at $165.