INVESTORS MAY SHIFT REFINING TO INDONESIA

FOREIGN investors in Malaysia may shift some existing palm oil refining operations to top producer Indonesia to tap higher margins after Jakarta lowered its processed edible oil export taxes, said a top Malaysian industry official.

That may put Malaysia’s over US$20 billion (RM59.91 billion) industry in jeopardy as foreign investors and smaller palm oil refiners process 60 per cent of the country’s output, said Palm Oil Refiners Association of Malaysia (PORAM) Chief Executive Mohammad Jaaffar Ahmad.

“Malaysia cannot afford to lose the investment already made by these non-integrated refineries,” Mohammad said in an interview today ahead of the Bursa Malaysia Palm Oil Conference next week.

“The consequence could be catastrophic especially for the smallholders and private millers which are depending on them now to off-load their fresh fruit bunches and crude palm oil.”

Mohammad did not give a value for the investments at stake but firms like US agribusiness Cargill and Japan’s Nisshin Olio operate refineries in Malaysia where the margins have come under severe pressure in recent months.

This is due to Indonesians offering discounts on processed palm oil to markets in India and Pakistan as they enjoy a price advantage of US$100 per tonne because of lower export taxes, Mohammad said.

Eyes On Indonesia

Malaysia’s Commodities Minister said yesterday that Jakarta’s export tax change may hurt plans for 25 new refineries with a combined capacity of 9.6 million tonnes.

Independent Singaporean refiner Mewah, which owns some of the biggest factories in Malaysia, has already said it would delay ongoing plans for a new processor in Malaysia’s Sabah state to focus on building one in Indonesia.

Now existing players may follow Mewah so long as the government keeps an annual tax-free crude palm oil (CPO) export quota of 3 million tonnes, which tightens supply, raises feedstock costs and reduces factory use rates, Mohammad said.

Malaysia taxes crude palm oil exports to protect its refining sector where capacity stands at nearly 24 million tonnes but imposes the quota to help firms like Sime Darby and IOI Corp feed their overseas refineries.

Mohammad said the duty free export quota will reduce the average refining capacity utilisation this year to about 68 per cent.

The impact will be more pronounced with the quota estimated to mop up about 15 per cent of Malaysia’s projected crude palm oil output this year of over 19 million tonnes.

“For some refineries with a refining capacity utilisation rate of less than 60 per cent, it would be difficult to sustain their operations,” Mohammad said.

The bigger blow for these standalone refiners will come from Indonesia where greater refining capacity use and lower export taxes will see less crude palm oil shipped to Malaysia.

Last year, Malaysia imported a record 1.3 million tonnes of crude palm oil from Indonesia to keep its refineries running and Mohammad said this year the limited imports could be costly and further depress margins.

Big Malaysian palm oil firms with a huge plantation bank and refineries like Sime, IOI, KL Kepong and United Plantations will still survive, Mohammad said.

“But this will not stop them from investing in Indonesia because they have plantations there. Some have already joint-ventures in Indonesia in the downstream industry,” Mohammad said. (Reuters)