PALM BEACH, FLORIDA, U.S. – An industry that is only 30 years old, growing at a rate of more than 7% per year and operating at capacity utilization rates as low as 30% in the recent past was how flour milling in Southeast Asia was described to members of the North American Millers’ Association (NAMA).
A profile of an industry dramatically different from milling in the Americas was offered at the NAMA annual meeting by Greg Harvey, managing director and chief executive officer, Interflour Holdings Ltd., Singapore. Harvey spoke Oct. 24 during the general session of the NAMA meeting, held at The Breakers in Palm Beach, Florida, U.S.
The milling industry that has emerged in Southeast Asia over the past generation followed an extended period in which flour into the region overwhelmingly was supplied through flour imports. The growth of a domestic industry was a result of the dismantling of a centralized model that had prevailed earlier, Harvey said. Under the old milling business model, governments would buy wheat for privatized mills. The businesses would give the flour they produced back to the government and would be paid by keeping the millfeed.
“This all changed after the International Monetary Fund came in and called for deregulation,” Harvey said.
Within the constellation of milling companies currently operating in Southeast Asia, Harvey described Interflour as “small to medium” in size. The company operates mills in Malaysia, Vietnam, Thailand and The Philippines. Because Turkish flour imports are another, sometimes disruptive, flour supply source in Southeast Asia, Interflour also has acquired a mill in Turkey.
Harvey described both the challenges and the attraction to milling in the region.
“The cultures in the region are very diverse, which anyone entering the milling industry must bear in mind,” he said. “It’s especially important if you are a Western-style investor.
“The middle class in Asia will grow six fold in number over the next 20 years. It will increase by 50% to 100% in Africa and the Middle East. That underlines what we are talking about in our part of the world – the development of the middle class.”
He estimated per capita flour consumption will grow to 64 lbs by 2020 in Southeast Asia, up from 37 lbs in 2010.
Noting the absence of large multinationals in the region’s milling industry, Harvey predicted there will be consolidation in coming years in many emerging markets worldwide.
Offering a glimpse at the individual markets of Southeast Asia, Harvey said 52% of flour use in Indonesia goes into the production of noodles, 22% is used for bread and 10% apiece for biscuits and fried foods.
“Noodles are dominant, but bread is where the growth is,” he said. “As a company, we are strategically focused on bread.”
As is the case in many parts of the region, capacity utilization in Indonesia is unimpressive but poised to rise. Harvey estimated utilization at 52% in 2014, a figure that has grown from 36% in 2010 and which he said will grow to 88% in 2020, given the current compounded annual growth rate of 7.6%. The increased utilization is premised on a halt to mill capacity additions.
Harvey said capacity utilization at Interflour mills has been significantly higher than the industry averages. Overall, the company is expected to operate at 79% of capacity in 2014 across the region, versus an industry average of 52%.
In the countries profiled, utilization rates in 2014 included 43% in Malaysia, 37% in Vietnam, 67% in Thailand and 60% in the Philippines.
Annual growth rates in Vietnam, Thailand and the Philippines all are in the vicinity of 7% per year, Harvey said. As a result, wheat demand in the region will grow to 13.2 million tonnes in 2020 from 9.3 million tonnes in 2014, he said. Demand in Malaysia is projected to grow more slowly – an average of 3.4% per year.
“Southeast Asia will depend on markets other than Western Australia going forward for their wheat supply as that country is nearly tapped out,” he said. “The Black Sea is expected to make up the difference. The same is likely (in) the case of the Middle East and Africa.”
He projected Interflour alone will experience a 14.8% annual growth rate in wheat purchases between 2014 and 2020.
In addition to predicting the entrance of multinational companies in Southeast Asia in the years ahead, Harvey said a shakeout of smaller companies is likely as well. He also said initial public offerings of milling companies are possible in the years ahead.
Sharing further details of the Interflour business, Harvey said the company currently has 6,500 tonnes of daily wheat milling capacity (equating to about 106,000 cwts of flour daily) and is looking to grow to 10,000 tonnes per day (150,000 cwts) by 2018 while becoming a leader in its markets.
He cited projects the company has under way or on the drawing boards for a number of countries in the region.
While multinationals may not be major players in Southeast Asia milling yet, Interflour’s owner is hardly a modest business – Salim Group is the largest business conglomerate in Indonesia. Salim also owns PT Bogasari, a large flour mill in Jakarta.
Harvey said Interflour, which was established in 2004-05, has been growing rapidly.
“Our growth has not been extraordinary,” he said. “It’s pretty typical of a milling company in Southeast Asia.”
If the roster of milling companies in Southeast Asia is diffuse, the same may be said even more strongly of the customer base, Harvey said. Interflour has more than 3,000 individual customers.
“A very hands-on sales force is needed,” he said. “The ability to ‘pick up the cash’ is key. It isn’t a market conducive yet to electronic transfer. Bribery and corruption are a challenge, but it is improving as development improves. Internal audit is crucial.”
Other challenges described by Harvey include access to capital, the lack of access to domestic wheat supplies, foreign exchange management (for instance, the currencies of Turkey and Indonesia have been two of the weakest global currencies versus the dollar) and the threat of major milling companies as competition.
“Consolidation of the global wheat supply chain is a concern,” Harvey said. “It makes everyone in the milling industry uneasy.”
Asked about whether demand in the region is limited to white flour, Harvey said demand for whole wheat flour is very limited.
“Asian cultures, they love just ‘Snow White’ flour,” he said. “Any hint of something off-white is perceived as bad for you.”
He said as the middle class and wealthy travel, they will gradually discover “whole meal” bread.