12/03/2012 (The Star) -  Independent local palm oil refiners are pushing for the abolishment of duty-free export quota for crude palm oil (CPO) and crude palm kernel oil (CPKO), given yearly to selected local plantation companies with refineries overseas.

Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohamad Jaaffar Ahmad said: “We support one of the fallback positions proposals, that is to abolish the duty-free export quotas to help secure a steady supply of feedstock for local refiners affected by Indonesia's latest low palm oil export duty structure.”

He said the total operating refining capacity, currently at 23.97 million tonnes, was more than enough to refine the total CPO production in Malaysia.

“Ideally, if the price of CPO is competitive and the supply of CPO is made available, we can refine all the local CPO production forecast at 19.36 million tonnes this year,” Jaaffar told StarBiz.

However, at the current refining capacity and forecast CPO production of 19.36 million tonnes minus about three million tonnes for the CPO duty-free export quota, he said local palm oil refiners would only have an average refining capacity utilisation rate of 68%.

He pointed out that for some refineries with a capacity utilisation rate of less than 60%, it would be difficult to sustain their operations.

Furthermore, if Indonesia's refining capacity improved and the export duty differential continued to favour processed palm oil in the republic, local refiners did not expect Indonesia to export more CPO this year, Jaaffar added.

Last year, Malaysia imported a total 1.30 million tonnes of CPO, mainly from Indonesia, to support its utilisation rate.

“However, local refiners are doubtful about the availability of CPO and the amount of imports; and if available, at what price level?” he said.

“A country should not give away (CPO duty-free), its strategic advantage (CPO as feed-stock) and undermine its own industrialisation activity (the local refineries).”

The refining sector is a workhorse of the industry as it converts CPO into processed oils at a minimum charge, more often than not at a negative margin.

Last year, the average refining margin was only 1.4%, or RM45.14 to the cost of CPO of RM3,286 on per tonne basis.

However, in January this year there was a negative margin of minus RM18.81 and in February, it was at minus RM18.66 per tonne of CPO.

Jaaffar said: “The fact is, refining margins remain negative for many refiners especially for non-integrated refiners and refiners running at 60% or below capacity utilisation rate, who struggle to balance between buying CPO and selling the refined products at a differential price justifiable to their investment.”

There is also a misconception that the refining sector is making a decent profit.

For local refiners to survive, they need to have 5% to 6% average refining margin.

Poram's analysis shows the local CPO price is “indirectly supported” by the export of CPO duty-free quota to create supply liquidity.

If the refining sector is squeezed for margin and the sector is not able to sustain, eventually there will be a meltdown in the refining industry and other in-feed industries including oleochemicals and packed products.

As a result, Malaysia's palm oil stocks (both CPO and processed oils) will accumulate very fast to reach at least three million tonnes. At that trigger point, it is foreseeable that Malaysia's CPO price will also collapse.

According to Jaaffar, the previous thinking that the export quota for duty-free CPO would help reduce stocks and thus increase the price is no longer valid.

“The scenario now is different due to the Indonesian export duty structure,” he added.

Currently, Malaysian refiners are faced with three damaging situations:

● Indonesian export duty structure that gives advantage to exports of processed oils;

● European Union import tax structure that gives advantage to imports of CPO and disadvantages processed oils; and

● Malaysia's CPO price is artificially held up by exports of duty-free CPO.

Jaaffar noted that if the quota were to continue as is, there won't be an imminent collapse of the CPO price this year but he sees “a slow death for some Malaysian refiners within one to two years.”

“On the other hand, if the Government were to discontinue the CPO duty-free quota and mimic Indonesia's export duty structure, we expect the CPO price will go down temporarily but will go up again towards the year-end.

“In the long run, it will strengthen the CPO prices.

“In the current situation where there is not enough CPO available and the price is at least RM600 more expensive than Indonesia's CPO, we also do not foresee new refining capacity being invested in Malaysia,” said Jaaffar.

The bottom line is that companies will shift their investments if there is a clear comparative advantage to do so.

“The odds are against Malaysia now,” he said, adding that there was a need for a new policy or incentive from the Government to make the playing field even again.

“The refiners will survive if we can make a decent margin to compete.

“For a start, the Government must look at how the refiners could get a comparative CPO/CPKO (feed-stock) prices on par with Indonesia for the local market,” Jaaffar said.