South East Asian plantation stocks surge on biofuel news

Plantation stocks topped Bursa Malaysia's gainers list yesterday, buoyed by the announcement on Thursday of a joint initiative by the Malaysian and Indonesian governments to set aside six million tonnes of crude palm oil (CPO) annually for biodiesel (120,500 barrels per day). Previously, we reported that palm oil is a true GDP-booster for both Malaysia and Indonesia, the oil being the second biggest export earner for both countries, and that in 2005 the 'Plantation Index' outperformed all other indexes, including the tech and oil indexes.

The biofuels committment pushes this trend up even further. The rising prices of CPO, which breached RM1,500 (€321/$407) per tonne after stagnating at RM1,400 (€300/$380) in the first six months of this year, have also led to expectation of potentially higher earnings for plantation companies by year-end. Plantation players generally welcomed both governments' initiative to allocate six million tonnes, or 40% of their total annual production, for biofuel and biodiesel production effective this year.

Malaysia's CPO production is estimated at 15 million tonnes this year, with new annual capacity of about 600,000 tonnes. The country's palm oil stockpile stands at 1.6 million tonnes:
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Plantation Industries and Commodities Minister Datuk Peter Chin Fah Kui said on Thursday that Malaysia and Indonesia, the world's biggest CPO producers, had agreed to set aside 40% their CPO production annually for biodiesel.

Golden Hope Plantations Bhd chief executive Datuk Sabri Ahmad said the government-to-government biodiesel initiative was a good strategy for (CPO) price stabilisation.

“However, I believe many players would like to see the implementation undertaken in stages,” he said.

Former Malaysian Palm Oil Association chief executive M.R. Chandran said the initiative would boost CPO prices in the short term. “There was even market talk that a lot of companies are now revising their feedstock prices to between RM1,600 and RM1,700 per tonne from RM1,500 to RM1,600 previously,” he added.

There is, however, still no indication of the actual number of biodiesel players commencing operations by next year.

“If there are only 10 players starting next year, I believe Malaysia's current production and stockpile (without the allocation) can easily cater to the required 500,000 to one million tonnes of CPO for biodiesel production,” he added.

Chandran said the allocation would be more workable once Malaysia had more biodiesel players, possibly by 2010.

“It would be a challenge if all the 98 applications for biodiesel plants using nine million tonnes of CPO feedstock were approved by the government.''

Carotech Bhd managing director David Ho said CPO supply was still “more than sufficient and easily accessible”, at least for now.

He said Carotech's biodiesel plant was on track to produce an estimated 100,000 tonnes of biodiesel by the middle of next year, adding that the capacity for biodiesel was part of the supply equation.

Kulim (M) Bhd chief operating officer Zulkifli Ibrahim said the group's plantation division would be able to provide a steady supply of CPO for its two biodiesel plants, – in Tanjung Langsat, Johor and Jurong, Singapore –which would have a combined capacity of 200,000 tonnes when they commence operation next year.

Meanwhile, an Avenue Securities analyst said at current production levels, the stockpile might not be enough to meet the government's 40% output commitment to biodiesel.

He said the imbalance could drive up CPO price to RM1,800 per tonne, which would make biodiesel production unfeasible.

There is also the question of what takes priority – food or energy.

Mayban Securities Ridzham Zaidi Razuan said assuming that Malaysia and Indonesia contributed equally, the allocation would be three million tonnes per country.

He said as Malaysia's present inventory stood at about 1.6 million tonnes, the country would have to double output to meet its commitment, which would then cause prices to go up.

“The strong surge in CPO futures trading was a knee-jerk reaction, but prices are likely to stabilise,” he said.

CPO futures prices reached the highest in more than two years in early trade yesterday.

An analyst at a local brokerage asked whether the CPO committed would be supplied at a fixed price or according to market price, and also how the government planned to meet it.

He said companies would only go into a long-term sale programme when there was abundant stockpile but “currently we have a restricted supply situation.”

The Star.