Commodities Markets: Asia's plantations want for land

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The Wall Street Journal Asia 12 December 2006

By Matthew Walls 

SINGAPORE -- Despite swelling coffers thanks to soaring commodity prices, Asian plantation companies can't find enough of the one asset they need most land.

Shortage of land at home is fundamentally changing the way these companies plan to expand, and in the process benefiting countries that still have abundant arable land.

"The Chinese, the Vietnamese, the Thais, the Malaysians are all interested in planting [rubber] in other countries, because land is not available in their own countries" says Hidde Smit, secretary- general of the International Rubber Study Group.

China's Hainan State Farms has established a rubber nursery in Myanmar as a first step and plans to develop 300,000 hectares of rubber plantations in Laos and Myanmar in less than 10 years, with a total rubber output estimated around 500,000 tons. In November, state- owned Vietnam Rubber Group said it would lease 50,000 hectares of land in Cambodia to grow rubber, starting next year.

That area could be doubled in four years.

Malaysia's Sime Darby Bhd., now in the process of merging with two other state- owned palm-oil giants, is working to double its land bank in Indonesia to 200,000 hectares by 2008. "The biggest reason Malaysian companies come to Indonesia is land," said Witjaksana Darmosarokoro, director of the Indonesian Palm Oil Research Institute.

While observers say it is difficult to foresee the scope and speed of this outward investment, none doubt growth of foreign-owned plantations will boost overall output while shifting a sizable proportion of production to lower-cost nations.

The rush to get trees into the ground as quickly as possible began a few years ago, but is accelerating as commodity prices are at levels unseen in years or even decades in some cases. With oil prices hovering above $60 a barrel, palm oil's potential as a biofuel, for example, has greatly expanded the scope for its use. Natural rubber supply, meanwhile, is expected to see a deficit in the next six to 10 years.

Demand for other commodities such as sugar cane and corn, which are linked to biofuels, also has risen with the run-up in oil prices. Palm-oil prices are around 2,000 ringgit ($563.60) a metric ton, the highest level since 1998 when prices averaged 2,377 ringgit a ton.

Natural rubber futures, meanwhile, rallied to a 26-year high in July during a supply crunch. While some of those gains have been surrendered, an expected supply deficit for the next six to 10 years will keep its prospects buoyant, analysts say.

To capitalize on these favorable trends, plantation companies need to find and develop land quickly, which is becoming increasingly difficult in their home markets. Land suitable to grow rubber and oil palm is either saturated, as in China, coveted by real-estate developers, or fragmented into small holdings, as in Malaysia, making consolidation into economic holdings difficult. That has forced investors to look at countries so far considered risky investment destinations.

"The big problem is that the belt in which rubber grows is politically unstable," said industry veteran George Sulkowsky, managing director of Centrotrade, a rubber dealer with offices in Europe, the U.S. and Southeast Asia.

Decades of isolation brought about by wars in Cambodia and Africa, autarchy in Myanmar and political upheavals in Indonesia and the Philippines have until recently kept most investors away from the plantation sector in these countries. But it also has left these countries with "a lot of land ripe for outside investors," said Steven Schipani, a consultant to the Asian Development Bank.

The explosion of new investments by Asian plantation companies in neighboring countries could help ease future shortages of palm oil and rubber, and in doing so, keep prices at levels that don't force consumers such as tire makers and energy users to seek substitutes.

According to the International Rubber Study Group, the new investments in rubber plantations might increase output by one million tons in the next 10 years, from around nine million tons expected this year. Similarly, palm oil's use as a biofuel has begun putting a strain on edible oil supplies, and Indonesia's vast potential to expand production offers some relief, said Dorab Mistry, director of Godrej International Ltd., part of India's Godrej Group.

The prospect isn't without risks: Overproduction is a concern, analysts said, and these investments may be converting rainforest into monoculture plantations. There is also the issue of immigrant labor. Following Chinese and Vietnamese investment to Laos, Cambodia and perhaps Myanmar likely will be immigrant farmers. Nongovernmental organizations in Laos say northern Laos is under significant Chinese influence and that will intensify when newly planted rubber trees are ready to be tapped in about six years.

"The government of Laos, lacking any sort of tools to analyze the rubber phenomena, has not even thought about this issue, said David Bluhm, an agroforestry consultant who co-authored a study on Laos's rubber industry for GTZ, a German nongovernmental organization. At "some point, I think the government will have to ask itself some tough questions about rubber and social demographics."


Allan Sun in Beijing, Reuben Carder in Jakarta and Benjamin Low in Kuala Lumpur contributed to this article.