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."