Small, dynamic Malaysian planter Hap Seng Plantations plans to expand its oil palm estates by a third, to 118,000 acres (47,753 hectares), over two years to exploit still resilient demand for palm oil, a top official said on Monday.
But a long-standing sales duty on crude palm oil for key producer Sabah makes the country’s shipments less attractive than rival Indonesia, said Executive Director Au Yong Siew Fah, whose firm is based in Sabah.
“Palm oil margins are decent enough for us to expand from our base in Sabah, with current prices hovering around 2,000 ringgit ($540) per tonne. We are looking at 20,000 to 30,000 acres,” Au Yong said, speaking here as part of the Reuters Food and Agriculture Summit.
“There is still demand for palm oil but there has been a shift to Indonesian palm oil because palm oil producers in Sabah have to pay a sales tax of 7.5 per cent and this is where most of Malaysia’s palm oil comes from.”
The eighth largest listed palm planter in Malaysia’s benchmark plantations index, Hap Seng Plantations is 51 per cent owned by property-to-fertilisers conglomerate Hap Seng Consolidated.
The acquisitions, estimated at RM300 million, will be financed by mix of cash and bank borrowings, Au Yong said.
“We are in a good position financially to acquire, despite the fact that degraded agricultural land in Sabah is still at a premium due to a land shortage,” Au Yong said.
Hap Seng Plantations has a short term investment and cash balance of RM 45.7 million ringgit at the end of 2008 while its parent held RM307.6 million by Sept 30 last year.
Although palm oil prices have tumbled 56 per cent to around RM1,930 from a record of RM4,486 last year, the cost of planted assets is still 50 per cent higher than at the start of the boom in 2007.
It costs RM16,000-20,000 per acre to buy agricultural land in Sabah and the neighbouring state of Sarawak – the last frontier for Malaysia’s palm oil push.
Sabah accounts for a third of the country’s total palm oil output of 17.9 million tonnes and total oil palm estates of 10.6 million acres.
Palm oil, used in products ranging from sweets and lipstick to biofuels, has narrowed its discount to rival US soya oil to the smallest in a year as stocks shrinks and demand stays buoyant.
Cargo surveyor Intertek Testing Services reported on Monday that Malaysian palm oil shipments rose 16.18 per cent to 591,567 tonnes from 509,200 tonnes shipped between Feb 1 and 15.
“Palm oil prices are in a good range of RM1,900-2,000 ringgit, but we would be losing market share to US soyoil in months to come on price,” Au Yong said.
Crude palm oil futures have now jumped nearly 20 per cent since January, while US soyoil is down 9 per cent, narrowing the spread between the two contracts to below $150 a tonne, one-third the recent peak spread last August.
But the major worry is Indonesia, the world’s top producer of palm oil, which removed in January export taxes of crude palm oil, until the minimum reference price in Rotterdam reaches US$700 a tonne. This figure stood at $607.50 last week.
The state governments in Sabah and Sarawak impose a sales tax of 7.5 per cent on crude palm oil when the price of the commodity crosses a threshold of RM1,000 per tonne.
Crude palm oil prices in Sabah, inclusive of tax, amounted to 2,182 ringgit per tonne last week. Indonesia’s cash price for the commodity is 3 per cent lower.
“This tax sucks on us and the planters suffer the most on this. At a time of recession, we should be getting rid of all these taxes and staying in step with the Indonesians,” Au Yong said.
“Then again, the government does need revenues to finance its budget spending but it’s not a winning situation for us.”
Shares of Hap Seng Plantations have fallen 15 per cent over the past six months, outperforming the broader Malaysian market’s drop of 17.5 per cent.
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