PUTRAJAYA, Feb 27 – Malaysia’s second largest listed palm planter IOI Corp will build a refinery in Indonesia once it generates enough feedstock from its plantations in Borneo island in the next three years, a top official said today.
Foreign firms have been scrambling to set up processors in the world’s top producer of the tropical oil to tap higher margins after Jakarta last year slashed export taxes of the refined grade to half of that of the crude variety.
While Malaysian firms like Sime Darby and KL Kepong have ample planted land in Indonesia to start up refineries quickly, IOI – a latecomer to Indonesia, will need more time.
IOI Corp’s Group Executive Director Lee Yeow Chor, said the firm’s two Indonesian units will plant 25,000 hectares a year over the next three years – an ambitious target given it has planted 2,200 hectares in the financial year ended June 2011.
“We are building up our planted Indonesian hectarage and in about three years time, we will have sufficient volume for a refinery,” Lee said in an interview ahead of the Bursa Malaysia Palm Oil Conference next week.
“I think we are progressing at a sustainable pace,” Lee added but declined to give the projected capacity for the plant.
With a market value of RM34.9 billion (US$11.59 billion), family-run IOI currently has about 95,000 hectares of land in the province of Kalimantan in Borneo Island after venturing into Indonesia in 2007.
That is less than half of Sime Darby’s land in Indonesia, which stands at about 280,000 hectares. Sime is also expected to fire up a 750,000 tonne Indonesian refinery by this year.
Shares in IOI were down 0.4 per cent by 0727 GMT, underperforming the broader market that was up 0.1 per cent.
IOI owns almost a tenth of Malaysia’s 24 million tonnes of refining capacity, making it the biggest processor in the southeast Asian country and also the most vulnerable to Indonesia’s export tax changes.
Indonesian refiners have been offering discounts for refined palm oil products due to the higher margins from the cut in export taxes, leading to a decline in orders and earnings for Malaysian processors.
Indonesian refiners also get cheaper feedstock as the export taxes for crude palm oil (CPO) have been raised to support the processing industry.
“The Indonesian export tax for crude palm oil will have to be moderated because there is a fairly big sacrifice borne by the growers in Indonesia that are made up of small farmers in terms of lower domestic prices,” Lee said at IOI’s headquarters in Malaysia’s administrative capital of Putrajaya.
“For the Malaysian firms, there is still a place in the industry. We would have to go further downstream where we enjoy an advantage over the Indonesians in terms of a better reputation and better logistics supply,” he added.
Apart from IOI’s exposure to weaker palm oil margins in Malaysia, analysts have been concerned about the firm’s aggressive bid to develop property in Singapore at a time when the housing market is softening.
IOI in January made headlines for paying US$316.22 million (RM957.18 million) for a tender of a parcel of land in the city state, which Maybank Investment said was 13 per cent higher than the second highest bid by UOL Land.
The move came a month after Singapore said foreigners who buy private homes will have to pay an additional stamp duty.
IOI currently owns five projects in Singapore with a gross development value of S$5 billion (RM12 billion), fuelling concerns it was straying too much from plantations – its key profit earner.
“We have been cautious about Singapore property. In fact, we refrain from buying landbank during the up-cycle and bought the recent one in the down-cycle,” Lee said.
“This is really part of our diversification strategy. About 30-35 per cent of the company’s earnings and investment portfolio will come from the property division and it is reasonable.”
In the last financial year, IOI said plantations accounted for 55 per cent of its operating profit while property made up 27 per cent. – Reuters