28/09/05 MUMBAI (Dow Jones)--In the quest for supremacy in the globalvegetable oils market, the Malaysian and Indonesian palm oil industriesare gradually getting closer to each other, blurring national borders.

Such cross-border integration will present a win-win opportunity for bothcountries at a time when plantation acreage is steadily rising inIndonesia while Malaysia still has a surplus in refining capacity, tradersand industry analysts said.

"I think we are moving toward integration. It is happening slowly.Malaysian companies are acquiring oil palm plantations in Indonesia,"managing director of IJM Plantations Bhd., Velayuthan Tan said on thesidelines of an industry gathering over the weekend.

According to Derom Bangun, chairman of Indonesian Palm Oil Producers'Association, Indonesia's average annual increase in oil palm acreage hasbeen around 300,000 hectares.

Most of the expansion is taking place in Kalimantan and the newplantations are expected to go into production by 2007, he said.

Malaysian plantation companies such as Kuala Lumpur Kepong Bhd. (2445.KU),Golden Hope Plantations Bhd. (1953.KU) and Kumpulan Guthrie Bhd. (3131.KU)are playing a significant role in this expansion in Indonesia, said IJM'sTan.

Malaysian companies are taking land on lease from the Indonesiangovernment for a long periods of 30 to 60 years in Kalimantan to developoil palm plantations, he said.

"Not only is spare land available for expansion (in Indonesia), cheaplabor is also abundant," said Derom.

On the other hand, land availability in Malaysia is limited and Malaysiancompanies now have to focus on raising yields and oil-extractionefficiency to boost output, said M.R. Chandran, director of Oilpalmworld,a Malaysia-based e-commerce portal dealing in palm oil and relatedproducts.

Malaysian Refineries Processing Indonesian CPO

Malaysian refineries, that have a combined surplus crude palm oilprocessing capacity of around 5 million tons, are already processing CPOimported from Indonesia, said Chandran.

"We produce a little over 15 million tons of crude palm oil every year,while the refining capacity is around 20 million tons," he said.

In Indonesia, on the other hand, refining capacity hasn't kept pace withthe growth in CPO output as investment in processing typically lagsinvestment in plantations.

Transnational plantation companies, which produce oil in one country,usually refine it there itself but in the case of Indonesia, many areshipping oil to neighboring Malaysia to take advantage of excess refiningcapacity there, Tan said.

According to Chandran, Malaysian CPO production is expected to peak at 20million tons by 2012 and the country is already looking for opportunitiesto develop oil palm plantations and processing units in other regions suchas Europe and Africa.

"I think the last major oil palm plantation expansion in Malaysia hasalready taken place. This happened between 1989 and 2001 in the Sabahprovince and the young trees are now beginning to bear fruit, one of thereasons for the significant rise in output in 2005," said Tan.

Malaysian CPO output is estimated to reach 15.1 million tons in 2005, upfrom 13.9 million tons last year.

Palm Oil Trade Getting More Globalized

Industry participants say palm oil trade is no longer the monopoly of ahandful of producing and consuming countries, but is fast becoming muchmore global in nature.

"I think the world market's dependence on palm oil will grow in the yearsahead, as production of seed oils and animal fats cannot keep up withincreasing demand," said Thomas Mielke, editor of Hamburg-based industrypublication, Oil World.

The largest palm oil refinery in Europe, has been set up in Rotterdam by aMalaysian company, IOI Corp., said Chandran.

More such facilities are coming up in Hungary, Poland and Czechoslovakia,he said, adding Malaysian companies also have a stake in Pakistan's recentinitiative to set up palm oil refineries.

An example of the expanding reach of palm oil is its increased popularityin the United States, traditionally a major producer and exporter ofsoyoil, Tan said.

New labeling guidelines in the U.S, which will make it mandatory for foodmanufacturers to inform consumers about the amount of trans fatty acids,or TFAs contained in each product, starting 2006, has already lead to anincrease in the use of palm oil ahead of the regulation, Derom said.

The full enforcement of the new regulation will encourage foodmanufacturing companies in the US to use more palm oil than soft oils, hesaid. Soft oils are believed to contain more trans fats, consideredharmful to human health.

According to latest industry data, the U.S imported 349,136 tons Malaysianpalm oil in 2004. During the first half of 2005 alone U.S import ofMalaysia palm oil has reached 271,163 tons.

Countries in the Middle East are also discovering the benefits of palm oilover other oils for cooking purposes, said Chandran, who earlier headedthe Malaysian Palm Oil Association, an industry lobby group.