14/07/2012 (The Star) - WITH its chapter closed on Crabtree & Evelyn's (C&E) global business venture by the end of this month, Kuala Lumpur Kepong Bhd (KLK), a plantation giant, is now more driven to undertake new expansion and strategic acquisitions to strengthen its core plantations and downstream oleochemical businesses.

Expressing that the disposal of non-core C&E is the right decision, chief executive officer Tan Sri Lee Oi Hian says: “KLK will steadily march along to capture opportunities for plantation development overseas while continuing to ride on our diversification programmes especially in oleochemicals.”

He tells StarBizWeek in a recent interview that KLK, like many other plantation companies with vested interest in oil palm related businesses, will need to strategically position itself to stay competitive amid the current highly challenging market conditions.

KLK is now among the top performing plantation companies in Malaysia with its businesses sprawling across Malaysia, Indonesia, China and Europe.

Lee: ‘The green field used to be about US$300 per ha
in the early 1990s’.

Back in 1994, the KLK Group made a landmark decision to invest in Indonesia through its maiden plantation land in Belitung Island.

Even during the Asian financial crisis in 1997, while many local plantation companies were shying away from overseas investments, KLK under Lee's stewardship continued to remain steadfast in KLK's investment in Indonesia with ventures into Riau, Sumatra and Kalimantan.

As a result of these investments in Indonesia and Malaysia particularly in Sabah, the KLK Group's landbank grew from 92,000ha in 1993 to 252,000ha with total planted area close to 206,000ha currently.

On the group's future land bank acquisitions, Lee says that; “We are always looking for new acquisitions.”

“However, do bear in mind that plantation land is quite hard to come by especially with the current high price of crude palm oil (CPO).”

But then, with the global economy slowing down, there will be opportunities out there for KLK (to undertake new landbank acquisitions), he adds.

According to Lee, the group has set a target to undertake about 8,000ha of new planting annually.

While Sarawak may still have some landbank for oil palm cultivation, Lee says that KLK will continue to focus on its existing plantations in the peninsula, Sabah and Indonesia.

“Any landbank expansion in the short term will likely be in East or Central Kalimantan area,” adds Lee.

In March, KLK, through its subsidiary KL Kepong Plantation Holdings Sdn Bhd, acquired PT Global Primatama which has the rights for 7,400ha in East Kalimantan.

He also does not discount the possibility that KLK may consider venturing into Africa within the next three years simply because “the Asean region is running out of land to cultivate oil palm.”

Over the past three years, there is a significant trend whereby many plantation companies from China, India, Malaysia and Indonesia are turning to Africa given its vast landbank and attractive workforce supply as the new favourite investment site for oil palm.

For example, plantation giant Sime Darby Bhd in 2009 was granted 220,000ha under a 63-year concession in Liberia to develop oil palm and rubber plantations in four counties Grand Cape Mount, Gbarpolu, Bong and Bomi.

Another prominent local player Felda Group is investing in new oil palm plantations in Cameroon.

Lee admits that growth in oil palm plantations globally is currently slowing down.

For example, Indonesia which used to be the favourite destination among local plantation players has turned strict when it comes to foreigners buying up plantation land there.

“When KLK first started to venture into Indonesia during the mid-1990s, the landbank there was still abundant.

“The green field used to be about US$300 per ha back in early 1990s, but now it has multiplied to about US$1,000 per ha and above depending on the location.

“The brown field there is even higher at US$10,000 to US$12,000 per ha,” Lee points out.

On the home front, he says that KLK is focusing on improving the efficiency and productivity of its upstream plantation activities.

“We want to further increase our palm oil yield per hectare. Our short-term target will be about six tonnes per ha.

“In fact, the national average currently is still low about four tonnes per ha, despite most planters will know that a good area will be able to yield as high as eight tonnes per ha,” he says.

On the oil extraction rate (OER), Lee says palm oil mills in Malaysia are slacking behind producing about 21% to 22% versus their peers in Indonesia which can reach up to 25% OER.

“While many Malaysian mills are aging, issues such as planting materials and management skills like the handling of loose fruits in the estates and checking on the optimum ripeness also hold significant impact on the overall country's OER.”

Therefore, Malaysia need to seriously address the basic but most crucial issue that is the current severe labour shortage in the estates nationwide. The current ratio now is one estate worker to 8ha, and that needs to improve.

“Further mechanisation in the oil palm estates is urgently needed, but currently no impactful solutions are foreseen in the short term,” adds Lee.

Apart from expanding the upstream operation, KLK Group is also putting similar emphasis on its downstream operations especially overseas.

Lee says the group has RM1bil worth of major downstream projects ongoing at this time. This includes constructing three palm oil refineries, one oleochemical plant in Indonesia and expanding its fatty acid plant in Europe.

He adds that the KLK Oleo Group is targeting to increase its current fatty acids capacity totalling 750,0000 tonnes per year to about one million tonnes.

Lee spearheaded the KLK Group into the oleochemical business in 1991 with the introduction of oleochemical products manufacturer, Palm Oleo Sdn Bhd.

Palm Oleo in fact is one of the largest standalone fatty acid producers in the world.

Currently, KLK group has expanded its oleochemical operations to China, parts of Europe such as Germany, Switzerland and the Netherlands and is looking to do the same in Indonesia.

Asked on the CPO price outlook, Lee's right hand man, KLK plantation director Roy Lim says; “Anything above RM3,000 per tonne is definitely good for many plantation companies.”

Last year, the cost of production (COP) for efficient planter such as KLK is about RM1,200 per tonne.

“In the first half of this year, our COP is definitely higher given the lower crop as well as the imposition of minimum wage for workers by the Government,” he adds.

Lim admits that it is difficult to gauge the next direction of the CPO price even though there is bullish fundamental like the serious climatic condition which could lead to lower crop production.

However, he adds that the bullish sentiment is likely to be dampen by the unresolved eurozone debt crisis as well as the economic slowdown in the US and China.

While much have been achieved in KLK's upstream and downstream plantation business, Lee also recognises the potential to unlock the value of KLK's substantial tract of plantation land in Sungai Buloh, Selangor.

The group has successfully completed its 230-acre mixed residential and commercial township Desa Coalfields in 2010.

Its latest 1,000-acre sprawling township project, Bandar Seri Coalfields, launched last year which sits directly opposite Desa Coalfields has to date attracted encouraging response, he adds.