FOCUS: Palm oil merger may deter some projects

01 December 2006 04:02  [Source: ICIS news]

By Shibu Itty Kuttickal

SINGAPORE (ICIS news)--A merger of the top three Malaysian palm oil majors coupled with rising crude palm oil (CPO) prices could set back non-integrated biodiesel projects, producers said.

Synergy Drive, a special purpose vehicle set up by CIMB Investment Bank, will buy Sime Darby, Golden Hope Plantations and Kumpulan Guthrie to create the world’s largest publicly traded oil palm company.

The ringgit (M$) 31.4bn ($8.7bn) conglomerate, will produce 2m tonnes or 13% of Malaysia’s annual CPO output.

The merger would help cut costs, reduce overlap in business as well as develop Malaysia’s biodiesel industry, government officials said in local media reports.

Golden Hope operates a 35,000 tonnes/year biodiesel plant in Banting, Malaysia. It plans to raise its biodiesel output to 400,000 tonnes by next year and to 550,000 tonnes by mid-2008. Sime Darby and Guthrie also have biodiesel projects in the pipeline.

The news came at an opportune moment for the three companies as the Malaysian CPO average weekly price hit M$1,815.50/tonne this week, a 13% jump from a month ago. It surged to above M$1,900/tonne before falling last week.

The surging demand for biodiesel could lead to CPO prices reaching M$2000/tonne in the first quarter of 2007, vegetable oil expert James Fry, managing director of London-based consultancy LMC International, said.

Prices would continue to rise on the back of the declining Malaysian stocks, Fry added on the sidelines at Palm Oil Refiners’ Association of Malaysia annual dinner in Kuala Lumpur on Saturday.

Also, CPO demand in the biodiesel industry would increase as it was still cheaper than other vegetable oil feedstocks, he said.

UR Unnithan, executive director of Carotino, an integrated biodiesel producer in Malaysia, said: "If Fry’s prediction proves true, non-integrated biodiesel plants cannot operate profitably."

Anhar Suki, engineering services director at Golden Hope, said: "In such a situation, standalone biodiesel projects would be in a tricky position."

He added that biodiesel from plants which were not integrated to oil palm plantations could not compete with diesel based on the current crude oil and CPO prices.

"Big plantation companies may not make much money on biodiesel, but we’ll be supported by the group, get our palm oil at a good price and our overall earnings will remain stable, he said.

"For us, it is an additional downstream market."

So far, more than 50 companies in Malaysia have received government licences to build biodiesel plants.

"We’ll have to see how many will proceed with their projects, with palm oil at the present levels," Anhar said.

Jerry Phung, chief executive of Malaysian non-integrated biodiesel firm Success Nexus, said the CPO price hike would probably hit standalone projects causing margins to be squeezed to less than 20% as costs continue to rise.

Companies which use old technology, based on refined, bleached and deodorised palm oil feedstock, would be hit, he said as this feedstock cost an extra $30-50/tonne.

However, he added that companies like Success Nexus which uses technology based on multiple feedstocks such as low grade CPO will not be greatly affected.

The company is constructing a 100,000 tonnes/year biodiesel unit at Perak to be operational by end-2007.

Besides the present uptrend in palm oil prices driven by speculative buying would not continue, Phung said.

More supply is expected early next year as Indonesia’s plantations which were started in late 1990s would mature, he added.

"This could put downward pressure on palm oil prices," Phung said.

($1=RM3.6)

ICIS Copyright © Reed Business Information 2009

Author: Shibu Itty Kuttickal
+65 6780 4359

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