Tuesday December 21, 2004

The plantation sector is set to maintain good growth in 2005. UnitedPlantations Bhd executive director (corporate affairs) Car; Bek-Nielsen,Golden Hope Bhd group chief executive Datuk Sabri Ahmad and PPB Oil PalmsBhd's MD Khoo Eng Min give their views in interviews with StarBiz.

CARL BEK NIELSEN - Vice-Chairman and Executive - Director CorporateAffairsUnited Plantations Bhd

How do you see the plantation sector moving in 2005?

The continued growth in world population combined with economicdevelopment will inevitably be the two most important factors that willdrive an increasing global demand for more food in the future. Thechallenges facing humanity in the years to come will therefore be how toincrease food production in a sustainable manner without adverselyaffecting the wider environment and social community in general. Thisincreased food production most definitely includes the sustainableproduction of vegetable oils and fats. In this connection, the Malaysianpalm oil industry, which produces more than 15% of the world’s totalvegetable oils and fats, will continue to play a significant role in thesupply aspect of future demands. I am therefore confident that theplantation sector will continue to move forward and further expand in2005, especially in East Malaysia where it will be one of the main enginesof growth.

What is your outlook for profit margins next year?

Profit margins for 2005 will be favourable for most palm oil producers dueto the lucrative prices, which are currently way above the moving averageover the last 10 years. However, having said that, it must be clear thatthe main challenge for most plantation companies is not to be too greedywhen profit margins are already very satisfactory by trying to sell at thevery top. As Paul Getty once said: "The person who buys at the bottom andsells at the top is yet to be born". This is something we at least shouldnot entirely disregard.

What are some further challenges for the sector?

Indeed there are several threats to the plantation industry’s futureeconomic viability which warrant the attention of all concerted parties.The combination of lower commodity prices (palm oil’s real price trend hasfallen on average by 3% per year with inflation from 1952-2003), highercosts and stagnating yields are definitely not the most palatablecocktail. The consequences of not facing up to these harsh realities andtaking remedial action will not only result in a loss of revenue andincome to the country, shareholders and smallholders but, moreimportantly, it could set in motion the grimmer effect of a gradualerosion of the plantation industry’s competitive edge vis-à-vis the world’s 16 other oils and fats. This would affect the livelihood of severalhundred thousand people who are dependent on this industry. It istherefore absolutely necessary for the oil palm growers to keep pushingthe frontiers of knowledge by exploring all possibilities of improving onthe existing planting materials, agricultural practices as well ascultivating an even more disciplined force of employees to ensure that thebackbone of this industry remains resilient in the future when the nextstorm of low commodity prices tears across the country. There is alwaysroom for improvement.

What were some of the major developments in your company in 2004; how didyour company tackle them?

The successful acquisition of Socfin’s Lima Blas plantation was indeed avery gratifying landmark in 2004. Another achievement which our companywas honoured to receive from the Prime Minister and the Human ResourceMinister was the Most Caring Plantation Employer award on May 8 in KualaLumpur.

What are the main activities at your company going into 2005?

The company will continue striving towards being the most efficient andproductive plantation company in this region and achieving this in asustainable manner. Continued emphasis will be placed on producingsuperior planting materials through our long-term commitment to researchand development. Concerted efforts will also be taken to further improveour agricultural practices thereby pushing yields and productivity to newlimits in future years. More emphasis will also be placed on riddingcomplacency in 2005 - this is especially important in times of favourableprices like now - and preparing ourselves for the next downturn incommodity prices. In this connection, cost consciousness, whether we likeit or not, is of immense importance and management will continue to geteverybody together and start digging this landmine called -cost-, which isthe concern of every responsible employee. In the end, to be costcompetitive is to be price competitive and this is alpha omega foreveryone who is in the business of producing a commodity like palm oil,where prices are not cost-driven but market-driven.

DATUK SABRI AHMAD - Group Chief ExecutiveGolden Hope Plantations Bhd

How do you see the plantation sector moving in 2005?

Next year will remain a challenging year in both operational and financialaspects for all plantation industry players. Most players are focusing onimproving operational efficiency and at the same time enhancingshareholder value. Companies will be exploring opportunities in upstreamand downstream activities as well so that they can integrate the businessinto the full spectrum of the business value chain, which may lead tomerger and acquisition exercises in the industry, both locally andabroad. Investment in downstream activities will be a pre-requisite toprotect hefty investment upstream by processing all produces. In addition,it is vital to diversify and balance income portfolios. For existingactivities, players will further strengthen internal processes such asmechanisation, modernisation, cost management, yield and extractionimprovement to maximise returns from the existing investment ventures. Itis also foreseen that the industry will adopt sustainable practices (i.e.integrated pest management, zero burning) in anticipating pressure fromenvironmentalists and also step up customer service measures (i.e.traceability). The Malaysian plantation industry as a whole will emphasisethe cultivation of oil palm and CPO production as compared tointernational players (downstream value-adding). For example, Malaysianpalm and palm-based product exports in 2003 were about RM28bil compared toa multinational corporation with a turnover of over RM200bil a year.

What is your outlook for profit margins next year?

We maintain a positive, outlook, subject to price factors. Buyingdirection of importing countries, production forecasts of competingproducts (i.e. soybean oil) and weather conditions will affect the demandand supply side which will in turn influence the price and direction.Golden Hope is always practising prudent cost-management at all levels toensure better profit margins per hectare and eventually to give betterreturns to shareholders.

What are some further challenges for the sector?

Amongst the challenges for the sector are:·To be operationally cost effective in order to be more resilient to pricegyrations.·To be portrayed as a sustainable and environment-friendly sector.·To enhance technology (processing technology) and the R&D aspects ofbio-technology (high yielding clones) and downstream activities to securea competitive advantage against competing countries, i.e. Indonesia.·To develop plantations on viable land overseas, i.e. Indonesia, in viewof scarcity of suitable land and high land prices in Malaysia.·To undertake branding exercise locally and globally for downstreamproducts.·To develop effective supply chain management in developing a fullyintegrated business.·To nurture human capital and competencies.

What were some major developments in your company in 2004; how did yourcompany tackle them?

Major developments in 2004 were:·Completion of rationalisation exercise with Island & Peninsular Bhd.·Acquisition of Hudson & Knight in South Africa.·Launch of GH500 oil palm planting material.

Golden Hope welcomes the rationalisation exercise because it createstremendous synergy amongst estates and oil mills and at the same timeleverages on our expertise and resources to achieve operationalefficiency. After all, Golden Hope has over 160 years of experience in theplantation industry. South Africa offers us vital access to a big market.It provides us a constant buyer for our CPO output and amongst thebenefits of the acquisition (of Hudson & Knight) are expansion of thebusiness; its current operations are synergistic with Golden Hope’s corebusiness. GH500 is the best oil palm planting material with a higherextraction rate ratio. It is available for purchase by interestedplantation companies so that it will benefit everyone in getting higherreturns on yield.

What are the main activities at your company going into 2005?

Golden Hope will be an exciting company to watch in 2005 because we arefocusing on:·Fully integrated estate operations with economies of scale.·Further involvement from upstream to downstream activities in the valuechain·Sustainable agricultural practices.

·Traceability and branding.·Well-established in-house R&D centre (consultancy, product development &biotechnology)·Global supplier of palm products to world class companies.·Performance-driven culture.

Golden Hope is always open to opportunities (i.e. acquisitions & strategicalliances). If an opportunity is genuine, feasible and synergistic withthe group, we will study and explore it thoroughly so that shareholdervalue can be further enhanced.

Our vision is: "To be the Global Leader in the Sustainable Plantation,Commodities and Oils & Fats Businesses"

KHOO ENG MIN - Managing DirectorPPB Oil Palms Berhad

How do you see the plantation sector moving in 2005?

Overall, we believe 2005 will be another good year for the plantationsector. CPO production in 2005 is expected to reach around 14.2 milliontonnes, compared to with estimated production of 13.8 million tonnes in2004. CPO prices are expected to be maintained at around RM1,300 toRM1,350 per tonne, as the Asian rust outbreak among soybean plantings inthe United States is expected to put pressure on soybean production costsand may even put some areas out of production. Higher soybean productioncosts and lower soybean production, as a result of a reduction in yield orcultivated area, both auger well for firm CPO prices next year.

What is your outlook for profit margins next year?

We expect profit margins to come under some pressure next year because ofthe higher cost of inputs, especially fuel and fertilisers. Theanticipated ringgit-US dollar re-peg is also expected to put some pressureon CPO price, with a negative effect on profit margins. However, thecompany is confident that improved CPO production and the cost controlmeasures it has taken will negate some of the erosion on CPO prices andproduction cost increases.

What are some further challenges for the sector?

The plantation sector is heavily dependent on foreign workers and theiravailability. Recruiting sufficient workers to undertake the variouscritical tasks on the plantations and keeping recruitment costs low withinan acceptable range are constant challenges that the company faces. Therecent crude oil price increase will have a long-term effect on productioncosts and freight rates in general. While crude oil prices have nowstabilised somewhat, Opec’s recent decision to curtail crude oilproduction by some one million barrels a day is expected to maintainpressure on crude oil prices and keep them above US$40 per barrel. A highproportion of the plantings, especially in Peninsular Malaysia, is due forreplanting. Until old and unproductive plantings are replaced with higheryielding varieties, productivity will suffer and the production cost ofCPO will increase. This will erode our competitive advantage vis-à-visIndonesia. Fortunately, PPBOP has a very small proportion of old palms,with the majority of its palms in their prime production age. Apart frominstituting cost reduction measures, the company is in the process ofreplacing the older, less productive palms with high yielding clonal palmsto improve productivity and reduce production costs.

What were some major developments in your company in 2004; how did yourcompany tackle them?

In mid-2004, the company commissioned its eighth CPO mill at its projectin Suburmas, Sarawak. The 40tph CPO mill is a joint venture between PPBOPand Sarawakian plantation owners. PPBOP has maintained a presence inIndonesia since the late 1990s with the development of its first oil palmplantation in West Sumatra. Of the 7,750ha planted to date, 7,500ha are inproduction. In 2004, operations were geared up for expansion into centralKalimantan, where the company has acquired a gross area of 124,000ha forplantation development over the next five to seven years. To date, thecompany has planted close to 7,250ha in central Kalimantan, of which about1,000ha are in production. Embarking on a massive expansion programme is achallenge to the company’s resources and logistical adeptness.Fortunately, the company has an ample pool of experienced and trainedsenior and middle-management personnel to man the new Indonesian projects.In addition, the company is in the process of setting up a training centrein central Kalimantan to train the locals as plantation personnel for itsoil palm projects there.

What are the main activities at your company, going into 2005?

The company will concentrate on its expansion programme in centralKalimantan in 2005 and beyond. In east Malaysia, the company willconcentrate on planting undeveloped areas and replanting the oldunproductive palms to improve productivity and reduce costs. In the firstquarter of 2005, the company expects to commission its ninth CPO mill atits project in Sri Kamusan, Sabah. The mill, with a capacity of 40tph,will process the fruits from the company’s oil palm projects in Sugut,Sabah.