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CPO Refiners Struggling As Margins Remain Low
calendar24-10-2005 | linkDow Jones | Share This Post:

19/10/05 KUALA LUMPUR (Dow Jones) - Malaysian palm oil refiners remainunder pressure to diversify into new ventures as profits from traditionalbusinesses such as refining, plagued by decades-long overcapacity and weakmargins, are hardly improving, the head of one of Malaysia's oldestrefining companies said.

Expansion into further downstream areas like oleochemicals and specialtyfats is a path some companies have already been taking.

However, other avenues for refiners to increase earnings include movinginto the plantations business and customizing existing palm oil productsto better meet consumers' needs, said Low Mong Hua, executive director ofSouthern Edible Oil Industries (M) Sdn Bhd.

Conversion of palm oil into diesel may also be an option, but for now, thebio-diesel business is still shrouded in uncertainty and requires morestudy, he said.

"The refining business has gone through many stormy days, especially inthe 1980s. (Today) the business is still bad. Profit margins for refinersare practically as good as zero, or even negative, on a back-to-backbasis," Low said.

Spot crude palm oil in Malaysia is priced around $390 a metric ton, whilespot refined, bleached and deodorized palm olein is around $417.50/ton,representing a margin that for many refiners may not be enough to covercosts.

Established in the early 1970s, Southern Edible Oil was among Malaysia'sfirst three palm oil refiners. At that time, business boomed as palm oilbegan gaining popularity domestically as a cheaper alternative to coconutoil and as overseas markets like India and China began opening up, Lowsaid.

The lure of being part of the lucrative business sparked rapid capacitygrowth with dozens of new refineries being set up by the early 1980s.

That marked the start of the decline of profits as the industry began itsnow all-too-familiar struggle with overcrowding and excess capacity woes.

Refiners Moving Upstream Into Plantations

With increasing competition sapping profits from the refining business,Southern Edible Oil has been on a diversification drive over the past twodecades to form the larger Southern Group.

The group has expanded into the manufacturing of specialty fats such ascocoa butter substitutes as well as the production of soaps anddetergents.

It has also ventured into making animal feed and oleochemicals and hasrepackaged of some its bulk oils into smaller consumer-sized packs.

Southern Edible Oil's moves are not unlike those of other refiners whohave also taken similar initiatives, because even those newer businessesare beginning to feel the pinch as more companies get involved, Low said.

Refiners have to continue looking for new business opportunities, and onearea that holds promise is in the upstream sector, he said.

"The latest is we are starting to look into oil palm plantations tosupplement our income. That is where we can get CPO, where the pricegenerally fetches reasonable returns to give us some profits," Low said.

Instead of being purely buyers of CPO, refiners that get involved in theplantations sector can gain exposure to the attractive returns from thesale of CPO, where selling prices are often double production costs.

"We are already there, and lately, we have increased our area even more bygoing into Indonesia," Low said.

Southern Edible Oil's expansion into plantations has been mainly throughpartnerships with other companies, he said, adding that in total, thegroup now has interest in about 150,000 acres of plantations.

Another new area for refiners is the customization of their products tohelp penetrate markets where the use of palm oil may currently berestricted.

Palm oil, for instance, is usually shunned by buyers during the winter, asthe oil turns cloudy and may solidify in cold temperatures.

Differences in consumer preferences, weather conditions, transportfacilities and logistics infrastructure mean there is still room forrefiners to broaden on their product range, he said.

"All these variables can create a lot of opportunities and potential. Theonly thing is how aggressive (refiners) want to be in terms of marketingand development," Low said.

He cited the possibility of blending palm oil with other edible oils tocome up with a product that can be consumed in colder climates.

"If (refiners) go to where (consumers) are and study their conditions andcome out with something better to suit their requirements, surely theywill take (the products)," he said.

Viability Of Bio-diesel Still Not Proven

Meanwhile, Low said he was still cautious about recent industry optimismabout the use of palm oil as a diesel substitute.

"We have thought about bio-diesel, but decided to just hold on for now andwatch the situation," he said.

The process of making bio-diesel is not new, as the oleochemicals industryhas already been producing methyl ester for years, though not used forburning purposes.

But Low's reservations stem not from the scientific feasibility ofconverting palm oil into diesel. Rather, the main uncertainty is ingovernment policies, he said.

"In places like Europe, where the diesel price is so high, (palm diesel)is workable. But to what extent they will allow imported oils to go in isthe question," he said.

Europe currently uses mainly indigenous rapeseed oil for its bio-dieselneeds.

The sustainability of fuel oil prices at current high levels is also aconcern, as a downtrend could render bio-diesel unattractive again, Lowsaid.