BUSINESS: Palm oil, Malaysia and Indonesia
Far Eastern Economic Review
Jan 29, 1998

Engine Oil
  * By Salil Tripathi
    593 Words

By early next century, the ungainly oil palm is expected to oust the
diminutive soyabean as the source of the world's most widely consumed
vegetable oil. The giants of the palm-oil industry, Malaysia and
Indonesia, stand to benefit from the boom -- and regain some of their
lost growth momentum.
   At about the same time, Indonesia will overtake Malaysia as the
world's biggest producer of palm oil. Malaysia's share in volume terms
will decline to 40% by 2004 from 52% today, while Indonesia's will rise
to 41% from 27%, according to the Indonesia Palm Oil Producers
Association and the Palm Oil Registration and Licensing Authority of
 Malaysia's share is dropping because its labour is scarce and its
land costs high. A Malaysian plantation worker earns up to $15 a day --
five times what his best-paid Indonesian counterpart gets. Even at such
rates, Malaysia is unable to attract workers locally, relying on migrant
labour from Indonesia and Bangladesh.
   Malaysian land, at $4,000 a hectare, can cost four times what land
costs in undeveloped regions of Indonesia. So Malaysia's firms are
expanding palm-oil plantings at home (60,000 additional hectares in
1997) far more slowly than Indonesia's, which plan to add 250,000
hectares annually for the next five years.
   The Malaysians are aware of their problems, and forward-thinking
companies are working to mitigate them. United Plantations in Perak, for
example, has developed a fertilizer from the effluent of its oil mill,
reducing purchases of fertilizer by 10%. It has also built a light-rail
system through its plantations to take fresh fruit quickly to its oil
mill. "It's cheaper than trucks and faster," says Chairman Bek Nielsen.
"The result is that our fruit has very low free fatty acids" -- a
yield-inhibiting substance that forms after harvesting.
   The Palm Oil Research Institute of Malaysia, too, has aided the
industry in exploring new technologies and downstream processing. It's
currently experimenting with crude palm oil as a fuel, in cooperation
with Malaysia's national oil company, Petronas.
   Malaysian firms have expanded planting slowly mainly because in
recent years they have found a more profitable use for their land:
commercial development. But the result has contributed to a real-estate
glut. Of Malaysia's major plantation companies, Golden Hope (like London
Sumatra, formerly a subsidiary of Harrisons & Crosfield), IOI Holdings
and Kumpulan Guthrie have all diversified into property, which now
accounts for 20%-40% of their profits. Some have also put their money
into high-technology. Golden Hope, for example, has invested in
Cyberview Holdings, a company involved in Malaysia's controversial
Multimedia Super Corridor.
   Since 1994, Malaysian plantation companies have made forays into
Indonesia, where 40% of the 5.5 million hectares reserved for oil palm
is earmarked for foreign investment. KL Kepong, Kumpulan Guthrie and
Golden Hope have oil-palm and other estates in Indonesia. But Malaysian
investment became politically sensitive because of fears that Indonesian
smallholders would be pushed out of the market. The Malaysians have
stopped planting in Indonesia since 1996, exploring opportunities in
Africa and Latin America instead.
   Indonesia, which exports only 27% of its output, doesn't compete
significantly against Malaysia, which exports 85% of its crop -- mainly
to Russia, China, India and Pakistan. But a clash of the titans may be
in the offing: The markets in China and India are growing, giving
Indonesia a golden opportunity to export more as it produces more. China
has had a vegetable-oil shortfall since 1985; this year it will import 2
million tonnes. India's domestic production of vegetable oil, at 6.5
million tonnes a year, falls 38% short of its consumption.