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Ongoing Supply Risk, Improving Demand Brightens Prospects for CPO Prices - Dato' Lee Yeow Chor
31/10/2022The Edge Markets

IOI Corporation Berhad Group Managing Director and Chief Executive
Datuk Lee Yeow Chor
(File pic by IOI Corporation).

Crude palm oil (CPO) prices are expected to be continuously supported by supply constraints and its price competitiveness against other edible oils in 2023, amid unfavourable geopolitical development in Russia and Indonesia’s palm oil export-friendly policies, according to a senior executive in the sector.

IOI Corp Bhd group managing director and chief executive Datuk Lee Yeow Chor said CPO producers will remain well supported at palm oil prices ranging from RM3,500-RM4,000 per tonne, even though prices are a far cry from recent peaks.

“The price cycle earlier hit RM6,000-RM7,000 per tonne. Now it's RM3,500-RM4,000 per tonne in the last two months. I think at this level companies are still well supported. Indonesia is actively clearing their inventory since they changed their earlier restrictive policy to now which encourages export. The stock is not low, but at the same time it is not very high either.

“Globally, Russia is still threatening to reinforce the embargo on oil and grain export. If they do that, it will cause shortages in the market, particularly vegetable oil. So I think these factors would result in CPO prices being well supported,” he told The Edge after the group’s annual general meeting in Putrajaya on Monday (Oct 31).

Indonesia waived levies on exports of palm oil products in mid-July to reduce the high inventory it had accumulated after a three-week export ban in late April, which Jakarta had imposed in a bid to control the soaring domestic cost of cooking oil.

The ban was subsequently abandoned because of market and political pressures. However, the levy waiver remains in place and is scheduled to end after Oct 31.

Lee said that although Indonesia lifted the ban, the market is still very disrupted due to the tax waiver which might be extended until the end of the year. With the possible extension, Indonesia is very likely to continue to dominate the export market by offloading its CPO at a much cheaper and discounted price, and that could dampen demand for Malaysia’s exports.

“This has gone on for too long already. However, both Malaysia and Indonesia have our own target market. I think now it's more pertinent to look at the stock level in terms of export. During the Deepavali festival in the September and October period, there was a single-digit palm oil export from Malaysia. Overall, the stock is at moderate level at 2.1-2.22 million tonnes of CPO,” he added, noting continued demand recovery from key exporting countries like China, India, Bangladesh and Pakistan would further support CPO prices.

However, Lee said, from an industry player's perspective, the government should strive to level the playing field for Malaysian CPO exporters, so that locally produced palm oil remains competitive to its counterparts.

“I always believed in levelling the playing field because all these duties and levies distort the market. But the government will impose export duties on CPO to encourage downstream activities. But to me, it should be as little tax as possible which might distort the demand situation,” said the former chairman of the Malaysian Palm Oil Council (MPOC).

Malaysia's current October export tax for CPO is 8%, according to a circular on the Malaysian Palm Oil Board website.

The reference price is RM4,033.51 per tonne for October which is higher than the September reference price of RM3,907.51 per tonne.

Unharvested fruits due to labour shortage has led to substantial losses

Lee said the group was not fully able to optimise and achieve operational efficiencies due to severe shortage of foreign workers to work on IOI Corp’s nationwide plantations, whose total planted area is some 176,980ha.

A continuing shortage of workers is a problem though. “We applied and approved for 3,000 workers. We already got 800 workers and we are hopeful the rest will come progressively. We are shouldering single-digit loss on unharvested fruits. The loss is substantial in ringgit terms,” he added.

At the end of FY2022, IOI Corp expanded the deployment of mechanised mainline fresh fruit bunches (FFB) evacuation system to about 75% of total estate areas, up from 40% in the prior financial year.

In FY2023, the group will continue to focus on expanding the system, utilising tractors with grabbers to load and unload FFB into bins. It will also integrate the mechanised mainline FFB evacuation system with the mechanical assisted in-field collection to assist estates for efficient crop evacuation.

Targets RM100 million in profit from non-CPO segment

Lee revealed that IOI Corp is actively looking into increasing non-CPO income by converting oil palm by-products and processing waste into value-added products at a competitive cost.

“There are two fronts for non-CPO. One is planting higher value crops such as coconut and durian which we are doing and [is] progressing well. But we are also looking into exploiting the by-products of palm. For example, we are exploring effluent waste from palm oil mills to generate biogas that will be converted to electricity. We use the electricity for our own palm oil mill and also the surrounding housing estates," he said.

The company is also involved in the construction of a palm wood factory to convert oil palm trunks into high-performance palm wood boards and panels. The factory is targeted to be completed during the first quarter of 2023.

“This is actually high-performance wood blocks and panels which can be used as building materials and furniture. We are the first to do it in a quality and skilled manner,” said Lee.

Although non-CPO contribution appears dismal to its CPO revenue, Lee said it was important to diversify its revenue stream.

“Our main products are still CPO. But these are more value-added by-product utilisation. Another one is empty fruit bunch fibre. That we are seriously looking into the direction of pulp and paper production. At the moment, we are already using empty FFB for steam and power generation in our refineries," he said.

IOI expects to generate a profit of RM100 million from its non-CPO products annually.

Energy crisis in Europe could affect its German oleochemical operations

Lee said Germany’s high dependency on Russia for natural gas supply creates a high risk of production downtime and interruption for the group's operation in Germany which supplies oleochemical specialties.

Russia has cut off supplies of cheap natural gas to Germany that have powered factories and homes, in response to Western sanctions for its invasion of Ukraine.

It has two production sites in Witten and Wittenberge. IOI Oleo GmbH produces and sells a broad range of oleochemical products for a large number of industrial applications.

Both production sites are not equipped with any alternative source of heating or steam generation.

“Natural gas production has increased by three or four times since two years ago which has increased production cost by 10%. But we can pass that on to customers.

“But a more serious issue is the shortage of natural gas there. It means there is a possibility we ration our gas usage. It has not happened yet. We are reviving our diesel power generator as a backup. But that would only support us to a certain extent.

“The profit contribution is over 3-4% annually to the group. We just have to deal with it and [it] is a risk we have to put up with. We don't believe this would hurt operations," he said.

Witten and Wittenberge also produce active ingredients and excipients for the pharmaceutical industry, emollients, emulsifiers, texturisers, and a wide variety of multifunctional ingredients for the cosmetic industry.

IOI Corp bought Cremer Oleo GmbH & Co KG's entire oleochemicals business in Germany for €89.4 million (RM420.05 million) in 2015.

Shares of IOI Corp closed 0.74% to RM4.07, which translates to a market capitalisation of RM25.58 billion.

To those who would like to review and rewatch our 53rd Annual General Meeting, click here.


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