Pumping Palm Oil

by Ioannis Gatsiounis 
Forbes Magazine (June 18, 2007)

IOI's Lee Shin Cheng is a master at squeezing every drop from his vast plantations. The craze for biofuels is driving up prices, but caution is the watchword at this Malaysian company.

It's very good to be the world's largest palm oil producer--especially when a giant economy such as Europe's decides it must combat global warming and your product is signed up for the fight. Palm oil has long been used in food and cosmetics, but if they want to turn it into biodiesel for cars and buses, that's fine, too. So palm oil prices are soaring, and so are profits at Malaysia's IOI Corp. The share price is also on a tear, by the way.

But IOI, started in 1969 as a distributor of industrial gas, didn't get to be a $2.5 billion company by jumping on bandwagons. Four years after palm oil became a biofuel of choice for trendy European drivers going green, IOI hasn't added one acre to its plantations. It doesn't rule out making an acquisition to boost its land holdings, though. "If the price is reasonable, we're always open to it," says IOI Group Executive Chairman Lee Shin Cheng, not sounding like a man in hurry. "When the time comes, we'll be there."

And IOI has only recently gotten a license to build a biodiesel plant in Johor, on the Singapore border, that would produce 200,000 tons a year--hardly a huge amount. It says it may also invest in a second palm oil refinery in the Netherlands. "We're not going be an early bird in biodiesel, just like we weren't with oleochemicals [chemicals derived from fats and oils] and other areas," he says.

Lee's caution may be smart, for already the biodiesel craze is losing steam. The European Union kicked it off in 2003, when it mandated that by 2010, 5.75% of the fuel used for transportation be renewable, rising to 20% by 2020. A victory for the environment quickly turned into a defeat. The order set off an immediate rush to set up new plantations by clearing swaths of Southeast Asian rain forest and draining and burning peat bogs. That unleashed enormous clouds of pollution. The burning peat bogs were responsible for carbon emissions equaling 8% of the world's total, according to a four-year study by Wetlands International and two other Dutch groups. Now the Netherlands has suspended its subsidies for palm oil fuel, and some environmental groups are backing away from it. The country has begun developing a program to certify which biofuels come from sources that are environmentally sound.

Lee doesn't put much stock in the environmental findings, saying they've been cooked up by people pushing other plants, such as rapeseed, corn and soybean, whose oil also can be used for biofuel. But IOI doesn't figure to be affected much by the environmental rethink, anyway. If palm oil prices settle down as biodiesel demand rises less quickly, that's okay with IOI and its strategy of steady, long-term growth. In any event, it prefers to buy established plantations, or brownfields, rather than vacant plots, or greenfields that were recently cleared.

Even without dealing for more land, IOI's business has been booming. Three-month-forward prices for crude palm-oil are hitting alltime highs, rising by a third this year, to $760 a metric ton, after jumping 44% last year. That's propelled IOI's earnings by 67%, to $298 million, for the nine months ended Mar. 31, over the same period a year earlier. Revenue for the period was up 44%, to $1.86 billion. The stock is trading at around $8 a share on the Bursa Malaysia, up from just 45 cents in early 2001. Its performance put it on FORBES' Fab 50 list of the best of Asia-Pacific's large listed companies last year.

Recently IOI hasn't needed to buy land to boost production. It's long been known as one of the best-managed and most efficient producers in Malaysia, famous for squeezing every last drop of palm oil out of its 415,000 acres on 79 estates around the country. The average yield in Malaysia is 1.6 tons an acre, according to the country's Palm Oil Board. IOI, says Lee, is averaging 2.4 and will reach 2.8 in five years. The secret? "Proper planting and fertilizing, and making sure each palm bunch is collected," says Lee, who is 68. "I still walk through the fields to make sure each tree is producing the way it should." That may be an exaggeration, but Michael Greenall, an analyst who follows the palm oil industry for BNP Paribas, says there's something to it. He attributes the productivity to "hands-on management" and the high-yielding trees that IOI planted 10 to 15 years ago. Also, he says, IOI "maintained sound agronomic practices, even after the ringgit" was devalued in the late 1990s.

Whatever IOI can make, the world will take, because palm oil is used in everything from makeup to soap. "Most people don't realize it but from the moment you wake up, you're involved with palm oil," says Lee. He pauses in front of a window in his Putrajaya offices, outside Kuala Lumpur, displaying a Kit Kat bar, a vitamin bottle and a Coffee-Mate packet, processed products that use palm oil. The U.S. consumes some 200,000 tons of palm oil a year--contributing to Malaysia's status as the number two exporter of food ingredients to the U.S. last year, according to an Associated Press tally of U.S. International Trade Commission data--while 3.5 million tons of palm oil, mostly from Indonesia and Malaysia, are sent to Europe. Palm oil produces 70% of IOI Group revenue (most of the rest comes from property development and manufacturing), and IOI accounts for 11% of the world's palm oil exports.

The man atop this palm oil juggernaut grew up northeast of Kuala Lumpur on a rubber plantation, where his father ran a small Chinese food shop. He left school when he was 11 to help support his family, selling ice cream on a bicycle for four years before returning to finish high school. He interviewed with one palm oil plantation for a supervisory job, but wasn't hired because he didn't speak English--important then because Europeans still ran most of the plantations. (Some 20 years later he took over that company; he won't name it.) Instead, at 22 he became a field supervisor at another palm oil company. That is when he says he started to develop his hands-on managerial style and home in on what it took to maximize yields. In those days palm oil was used in detergent as well as for cooking.

By 1982 Lee was in control of a small company and used it to buy a listed gas outfit, Industrial Oxygen Inc. Two years later he set out to create the palm oil industry's blue-chip player. In 1995 he changed the name to IOI and today he and his family--he's married and has six children--own 40%. That's helped make him Malaysia's fourth-richest person; FORBES ASIA puts his net worth at $3.9 billion. His two sons and four daughters all work in the business, with his eldest son, 40-year-old Lee Yeow Chor, serving as an executive director. Is the younger Lee being groomed to take over someday? His father says yes, though retirement isn't on his mind. He says he's still "very strong" and has no idea when he might want to step down.

These days IOI is diversifying into specialty fats and oils and oleochemicals based on palm oil, leaving it less vulnerable to price fluctuations in crude palm oil. It bought two Malaysian companies, Pan Century Edible Oils and Pan Century Oleochemicals, for $120 million in January. The purchases lifted the group's refining capacity by half, to 3 metric tons a year, and made it the world's largest producer of vegetable oil-based fatty acid, with a roughly 10% market share.

But as well positioned as IOI is, challenges loom as the industry's landscape changes. For one thing, the center of gravity is shifting toward Indonesia. Rivals such as Kumpulan Guthrie, Kuala Lumpur Kepong and PPB Oil Palms have made a mad dash into Indonesia to boost their land banks--at a time when land for new plantations in Malaysia, where all of IOI's plantations are located, is scarce. Both countries have a similar number of planted acres, but Indonesia has millions of additional acres cleared for planting, and some analysts predict that it will surpass Malaysia this year.

What's more, IOI's title as the largest palm oil producer is about to be taken away. In January a government-backed company called Synergy Drive agreed to buy Sime Darby, Golden Hope Plantations and Kumpulan Guthrie, creating the biggest palm producer once the deal is finalized, probably in October.

But palm oil is a commodity, so it doesn't much matter whether a rival is bigger. And even without the demand for biodiesel, palm oil prices would keep rising. One factor is a drought on the islands of Sumatra and Kalimantan. Another is an expected switch to palm oil by more consumers as demand for other edible oils outpaces the supply. For now, at least, Lee appears to hold this industry in the palm of his hand.

http://members.forbes.com/global/2007/0618/030.html

Life of the Land cache