Malaysia fears RI palm competition

Malaysia fears RI palm competition

KUALA LUMPUR (Reuter): Malaysia's palm oil refining industry, languishing in the face of poor margins and Indonesian competition, is set to see more shake ups without support from domestic suppliers, officials warned on Monday.

"If this situation continues over the next two years, lots of (local) refiners will be cut down," cautioned R. L. Parakh, president of Pan-Century Edible Oils Sdn Bhd, one of the three largest palm oil refiners in Malaysia, the world's top palm oil grower.

Increasing cost of crude palm oil (CPO) and excess refining capacity over production have for a long time put pressure on refineries in Malaysia, industry officials said.

But aggressive rivalry since last year from Indonesia, which has been trying to sell as much refined oil as Malaysia and at a cheaper price, is making local refiners fear losing hard earned markets to their southeast Asian neighbor.

"If the government doesn't take a long-term view, it's going to be very, very dangerous. The ready-made markets we have created, Indonesia will take over," said Parakh in a recent interview with Reuters.

Officials said the gravity of the problem was reflected in the closure by Palmco Holdings Bhd of its refining unit, Palmex Industries Sdn Bhd, two months ago after citing difficult market conditions.

The company said returns for its investment at Palmex had been unsatisfactory for the last two years and added that prospects "are not expected to improve in the near future."

Officials said there were 45 licensed palm oil refineries in Malaysia but only about 20 were active. The giants in the business are also producers, such as state-owned FELDA.

Together, the active refineries have a capacity to process 11 million tons of oil while production is less than eight million tons a year, leading to a constant scramble for raw materials, said the officials.

If supply is irregular, margins are worse, say traders familiar with the situation.

Producers' insistence on selling CPO at prices higher or just lower than refined oil has resulted in most refineries either running at a loss or breaking even, said traders.

"We are the trading arm of growers and millers," said a trader with a local refinery. "We not only have to compete with Indonesian palm oil but also against soybean oil, rapeseed oil, groundnut oil, coconut oil and sunflower oil.

"When the local producers don't support us, we have to cut our margins," said the trader."But we can't sell below cost."

Traders said the average cost of refining a ton of palm oil was about US$30-$40.

Parakh said most refiners had diversified into various businesses because of the bleak outlook in the industry. Pan Century, which is not a palm oil producer, also owns oleochemicals and rubber products businesses.

"If you're strong, you can survive a year or two until the cycle returns in your favor, like last year when China came to buy Malaysian palm oil in big way," said Parakh.

A board member with the Palm Oil Refiners Association of Malaysia, Parakh said he had once suggested a buffer fund for palm oil to help both producers and refiners when prices were disadvantageous to either side.

"But vested interest among refiners who are also producers prevented this," he said. "There should be more cooperation among us for the survival of the whole industry."