18/08/2008 (Red Orbit) - MALAYSIA may see its position as the world's leading oleochemical producer in terms of market share undermined by the high prices of natural gas, industry players say.

The Malaysian Oleochemicals Manufacturers Group (MOMG) has appealed to the government to lower the price of gas used as an ingredient in the industry.

The 11 members of the group are willing to pay the new price for gas used as fuel, it said.

The members use about 32 per cent of their gas supply as feedstock to make oleochemicals, MOMG chairman Raymond Yap Ching Chwan said.

"We propose installing separate meters to measure natural gas used as fuel and as feedstock," he told Business Times in an interview.

From July 1 this year until June 30 2009, those using natural gas of less than two million standard cu ft per day (mmscfd) will pay a new rate of RM22.58 per million metric British thermal unit (mmBtu). It was RM12.74 previously.

This means that oleochemical producers will pay RM22.58 per mmBtu for natural gas, whether it is used as fuel or feedstock.

"We accept the higher rate of RM22.58 per mmBtu for gas used as fuel. But when it comes to feedstock, we hope the government will give due consideration to the nature of our industry," said Yap, who is also the chief executive officer of Cognis Oleochemicals Group.

He said the oleochemical producers were already burdened by the huge increases in palm oil and palm kernel oil prices.

Basic oleochemical substances consist of fatty acids, fatty acid methyl esters, fatty alcohols, fatty amines and glycerols made through various chemical processes.

They are used to make detergents, cosmetics, lubricants, soaps, and personal care and industrial products.

Before the natural gas rate increase, MOMG members paid an average of RM190 million per year. A month into paying the new rate, MOMG members estimate their annual gas bill to swell by 1.7 times to RM330 million.

"Natural gas makes up a big part of our processing costs. Before the tariff hike, it was 20 per cent. Now, it is between 30 and 35 per cent," Yap said.

It is now about seven weeks into the higher fuel rate, and Yap said MOMG members find it hard to pass on the full cost, at one go, to clients without risking losing market share to competitors.

According to the Malaysian Palm Oil Board, oleochemical manufacturers in the country can produce 2.6 million tonnes a year, commanding 25 per cent of the global market share.

"We've been the global market leader for the last 10 years. For every four barrels of oleochemicals produced in the world, one is made in and shipped out from Malaysia.

"Until recently, lower gas price was the only advantage we could use to partially offset the expensive palm kernel oil in Malaysia. This raw material is significantly cheaper in Indonesia because the Indonesian government imposes export tax on palm kernel oil.

"Also, our exports to China are effectively shut out by the Chinese government's import duty on oleochemicals," Yap said.

"We need a lead time of 12 months because the quantum of increase is very large and most of our clients order forward by three to six months," he added.

To help offset the increase in fuel cost, the MOMG also proposed that the government channel some of the palm oil windfall tax to the members.

"We propose a RM100 million reprieve from the windfall tax to help us tide over the current challenging period," said Yap.