7/2/06 KUALA LUMPUR (Dow Jones)--The Malaysian state of Sabah has embarked on a 10-year plan aimed at transforming itself into the hub of the Asia's palm oil industry, encompassing everything from plantations to processing and logistics activities, said an official involved in the development.

The ambitious project, once completed, could turn Sabah, located on Borneo island, into "the Rotterdam of the east," said Pang Teck Wai, chief executive officer of POIC Sabah Sdn. Bhd.

Rotterdam, in the south of the Netherlands, is Europe's predominant of edible oils processing, trading and shipping center.

The wholly state-owned POIC, which began operations in mid-2005, functions as the state government's vehicle to lead the project.

A site in Lahad Datu, on the east coast of Sabah, has been set aside for the development of a 5,000-acre industrial park catering exclusively to palm oil, the biggest of its kind anywhere in the world, said Pang.

The target is for the palm oil industrial cluster, after which the POIC is named, to contain all aspects of the palm oil supply chain including refineries, oleochemicals, biodiesel and food manufacturing.

It will also house the country's first palm oil-dedicated port as well as logistics facilities and services.

"In order to attract investors (to Lahad Datu), what we have to do now is to put in the physical infrastructure like roads, electricity, water, ports, jetties. That is our immediate role," Pang said in an interview.

Better known globally for its orangutans, mountain ranges and diving spots, Sabah has, in recent times, emerged as Malaysia's biggest palm oil producing state, thanks to the rapid growth of its plantations sector.

As the world's top producer, Malaysia yielded 15 million tons of crude palm oil in 2005, roughly a third of which came from Sabah.

Still heavily dependent on forestry and agriculture, Sabah is now banking on palm oil downstream activities to be the cornerstone of its push to become a fully industrialized economy.

"The state government has, for many years, been looking for a strategy to spearhead Sabah's industrial development in line with the national 2020 vision," Pang said, referring to Malaysia's overall target of achieving developed country status by 2020.

"We have found that palm oil may be the answer - by adding value to a raw material which we already have in abundance."

Capitalizing On Indonesia's Growth

The development of the industrial cluster will move at a pace of about 500 acres a year for 10 years.

Lahad Datu was chosen as the focal point as the surrounding areas are already home to many of the state's oil palm plantations, mills and refineries.

By the first quarter of 2007, an area of about 1,000-1,100 acres of fully developed industrial land is expected to be ready, Pang said.

Sabah's proximity to the Indonesian province of Kalimantan, also on Borneo island, is set to be a key factor in the future of the hub.

"In terms of the sourcing of oil, the Lahad Datu facilities are being set up with the intention of attracting oil from Kalimantan, because that is where the future expansion of oil palm plantations will be," Pang said, adding that availability of land suitable for oil palm cultivation in Sabah is declining.

Indonesia, the second largest palm oil producer in the world, recently unveiled plans to develop a massive oil palm plantation in Kalimantan as it bids to overtake its northern neighbor.

The Indonesian government is aiming to expand its oil palm planted area by about 3 million hectares within five years, out of which around 2 million hectares will be in Kalimantan.

Pang estimated that Kalimantan's CPO production of about 2 million tons currently would rise to 10 million tons by 2010.

"We're looking at a tremendous amount of oil that will be coming into Sabah and going into refineries, oleochemicals, biodiesel and then being shipped out," Pang said.

Pang said he believes Sabah will be in a prime position to be the value-addition center for Kalimantan-produced CPO because of a preference for Indonesian producers to export CPO rather than selling domestically.

"In Indonesia, the oil is priced at a discount of MYR60 to MYR80. So, it is usually in their interest to sell to Malaysia so they can get a higher selling price," Pang said.

He added a lack of deep sea ports that can handle ships carrying 25,000 tons or more in Kalimantan also gives Lahad Datu an advantage.

World's Biggest Biodiesel Plant Expected

As part of efforts to lure investors and companies to operate in Lahad Datu, the government will exercise some flexibility in offering incentives, Pang said.

For example, for permission to set up a new refinery in Malaysia, 50% of the palm oil that will be processed has to come from a related plantation company.

That rule may be relaxed to allow independent, non plantations-backed refiners to be set up in Lahad Datu, on condition they source the bulk of the palm oil from Kalimantan, Pang said.

Although still at a very early stage, the response from investors has been encouraging, with interest coming from South Korea, the U.K., China, Australia and Singapore. Most of these investors are keen to set up biodiesel and oleochemical plants.

An initial area of some 500 acres have been allocated for committed investors who are expected to sign agreements in the coming weeks.

One big investor to date is South Korea's Eco Solutions Co. Ltd., which recently unveiled plans to build a biodiesel plant with a capacity of 300,000 ton a year.

"We believe this will be the biggest biodiesel plant in the world," Pang said.