Malaysia Series: Resources Boom 1 comments

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One of the most reliable secular themes, if one believes that Asia is poised for a long-term boom (a view which has gained tremendous currency with the rise of the twin engines in China and India), is infrastructure construction. I have written on the infrastructure boom previously and allied to this idea will be that of a resources/commodities boom which we have already seen taking root in recent years. As a resource-rich country, Malaysia is a likely strong beneficiary.

Out of the nation's total export goods, mining goods (oil & gas, tin) and agricultural goods (palm oil, rubber, timber) comprise >20% of total exports. Their influence extends further than that, because a large proportion of domestically-mined/produced resources are supplied as inputs to the manufactured goods segment which form the balance 80% (in the form of petrochemicals, wood products, rubber products etc). Industrial sector growth drivers are categorised as resource-based and non-resource based (primarily electronics) ---- a measure of their importance.

The interesting aspects of the various natural resources that Malaysia is rich in are listed below, together with some Malaysian stocks that are considered good plays in the particular resource (only for reference, not recommendations):

Oil and Gas
What more needs to be said? With oil prices sustaining at US$60/barrel over the past two years, Malaysia's O&G industry is one of the key beneficiaries. Oil production occurs offshore and primarily near Peninsular Malaysia (off Terengganu); it also takes place offshore of Sabah and Sarawak. The oil industry is of a declining tendency, though, due to the lack of major new oil discoveries in the last years. The natural gas industry however looks more optimistic, with Malaysia being probably the world's third largest LNG producer after Algeria and Indonesia.

The natural resource also supplies feedstock to the downstream petrochemical industry, at which exports have been growing at 20% per annum over the last decade --- a growth industry. The potential lies in the expansion of petrochemical facilities, especially the development of new petrochemical zones in possibly Sarawak, Johor or Labuan; there are currently three petrochemical zones in Kertih (Terengganu), Gebeng (Pahang), and Pasir Gudang-Tanjung (Johor). Petronas is a major domestic investor in the industry. Malaysian oil and gas engineering services companies have also emerged as competitive global players.

Key players: Petronas, Scomi, Dialog, KNM, Wah Seong

Palm oil
I have covered the coming biodiesel boom in Indonesia and Malaysia in an earlier article. Malaysia is the world's largest producer of palm oil (45% share), and is aggressively positioning itself to benefit from Europe's drive to wean itself off oil into alternative energy products, specifically biodiesel.

Even without the emergence of biodiesel, palm oil has been taking market share in the world oils and fats market over the years, recently overtaking soybean oil as the top product. Palm oil processing facilities include palm kernel crushers (self-explanatory), refineries and oleochemical plants; product categorisation include palm oil/palm kernel products, oleochemicals (used in personal care products), biodiesel, palm biomass products. China and the EU are incumbent key export destinations.

Sabah has the largest oil palm cultivated area in the country, and the recent 9MP (9th Malaysian Plan) has earmarked new clusters along the Johor-Pahang border, along the Kelantan-Terengganu border, in Sabah and in Sarawak. It has also been issuing biodiesel production licences aggressively, with resultant heavy market speculation in the plantation sector late last year. Investments in the palm oil sector are likely to be among the highest of all sectors in the coming decade, with projected 8% growth in annual investments year-on-year. Finally, there has been a wave of consolidation within the sector with government acquiescence: the Wilmar-PPB Oil merger (now we're familiar with that!) and the PNB-driven Sime Darby+Kumpulan Guthrie+Golden Hope merger (to create the world's largest palm oil producer).

Beware valuations though!

Key players: IOI, Synergy Drive (the result of the abovementioned triple-merger), Asiatic, KL Kepong, Kulim

Timber/wood products
Primary processed products include sawn timber, veneer and plywood; secondary processed products include wood-based panel products and builders' carpentry/joinery; tertiary products include furniture and pulp&paper.

Malaysia is among the world's top three exporters in all primary wood products. There is tremendous downstream integration as well, where Malaysia is a leading global exporter of medium-density fibreboards (No. 4) and furniture (No. 2).

There is a developing situation of growing demand and tightening supply, which has led to rising timber prices rising >20% over 2005-06. On the demand side, there has been firm demand from China and India, as well as a recovering Japan. On the supply side, there has been a crackdown on illegal logging particularly in Indonesia, and in the long term there is growing insistence from developed countries that the extracted timber be from "sustainable sources" (ie. there must not be reckless extraction). But then again, if the US economy slows down, durables like furniture would be the first to suffer....

Key players: Jaya Tiasa, WTK, Ta Ann, Subur Tiasa

Rubber
It is clear from the above that the natural resources industries are vertically integrated through to the downstream products, which ensures maximum income is captured within the country's borders. This model is most clear in the case of rubber, where Malaysia is among the top three rubber producers (the other two being Indonesia and Thailand), but actually has to import latex to produce its key product: rubber gloves. It also exports substantial amounts of rubber tyres.

Rubber plantation acerage has decreased over the years in Malaysia and Indonesia, as many owners have switched to the more lucrative oil palm crop. This switch is set to accelerate with the aggressive biodiesel drive by both governments. At the same time, Thailand's southern provinces, which produces much of Thailand's rubber crop, has been embroiled in civil unrest, potentially disrupting distribution channels. The main substitute for natural rubber --- synthetic rubber --- will continue to suffer from high oil prices. All this suggests a strong medium-term outlook for natural rubber until new trees in other emerging countries (eg. India) mature sometime in 2010 and beyond.

Key players: KL Kepong, Top Glove, Kossan (the last two are rubber glove producers)

Tin
Once a mainstay of the Malaysian economy, tin mining has been on the decline for a good part of the past 15-20 years as falling prices took a toll on the industry.

Tin is a key component in electronics products such as mobile phones and televisions, due to its use in soldering applications. With the rise of China, it has enjoyed a revival in recent years.

Perak is the country's biggest tin producing state.

Key players: Perstima

References:
(1) Sahamas forum
(2) Malaysia 3rd Industrial Master Plan: 2006-2020
(3) The Star article Mar 2007: Analysts give oil and gas sector top marks
(4) The Star article Mar 2007: Analysts’ four favoured sectors