Refiners cry foul

PLAYING FIELD NOT LEVEL: Indonesia’s lower export taxes for processed palm oil are affecting the Malaysian industry


MALAYSIA may soon risk losing investments in the palm oil refining industry to neighbouring Indonesia if it does not come up with a policy to create a level playing field.

The industry has been suffering since last October because of the duty structure which Indonesia has put in place in August last year to boost downstream activities by lowering export taxes for processed palm oil products.

Refiners are crying foul, saying the playing field is no longer fair.

"Just because of this export duty structure which will affect our downstream activities in Malaysia, does it mean we should just hand it over to Indonesia after having built up the market for the past 40 years?"

Indonesia's move, in the long-term, will pressure crude palm oil (CPO) prices down, an unfavourable move when the world's top two producers should cooperate, said refiners.

The Palm Oil Refiners Association of Malaysia (Poram) lamented that the broad supply chain in the RM80 billion industry will also be affected.

"We are not against the export of CPO but it should no longer be subsidised overseas," Poram chief executive officer Mohammad Jaaffar Ahmad said in an interview.

In Indonesia, all CPO exports have to be taxed (15 per cent) to protect and expand their downstream capacity and collect revenue.

"But we have excess capacity and strong justification to keep CPO for our own downstream industries. Every tonne export of CPO will mean loss of market potential for a tonne of processed oils," Mohammad Jaaffar said.

Unlike Indonesia, the Malaysian economy has also suffered with the loss of RM7.8 billion over the past seven years through the subsidised export duty on CPO.

"But this cannot continue, especially with Indonesia's export duty structure in place," he noted.

Malaysia has several options to look at, including matching the full tax structure of Indonesia, improve the Malaysian CPO export duty structure and create a level playing field on feedstock prices.

Mohammad Jaaffar said a nagging fear is if Indonesia goes a step further and lands a "second assault" by lifting the duty on processed palm oil too, placing Malaysia in a worse scenario.

The industry has already put forth some recommendations to the government to enhance the competitiveness of the palm oil downstream industry in Malaysia.

A refiner, who did not want to be quoted, said the delay in the government's decision to come up with a new policy, had been costly for the past 10 months.

It has led to negative refining margins, in sharp contrast to the Indonesian refiners who enjoy a five to six per cent margin.

"Unlike the large plantation companies, independent refiners are expected to close down their operations in Malaysia or relocate to Indonesia, and be another competitor to the Malaysian players."

A market analyst recently pointed out that big Malaysian players are looking to invest in Indonesia to take advantage of the high margin for refiners. Mewah Group, for instance, has discontinued its plans in Sabah while KL Kepong has decided to build three refineries in Indonesia.

Mewah Group is one of the largest palm oil processors in the world with its current total daily refining capacity of 8,000 tonnes a day or 2.8 million tonnes annually.

Refiners feel the CPO price, above RM3,000 a tonne, is likely the main reason for the government to delay its decision to change the policy.

Take a leaf out of the Indonesian experience, they suggested, referring to Indonesia's latest moves which were based on its industry's recommendations.

"Worst still, Malaysia is turning the clock back from selling more olein value-added products to just a CPO exporter, prompting our overseas markets to continually seek more discounts."

Malaysia, they said, attracted foreign investments in the refining process because of the availability of raw materials.

MPOB statistics showed that in May/June imports of crude palm oil remained high at 40,000 tonnes (May) and 24,000 tonnes (June), while imports of processed palm oil continue to rise from 88,000 tonnes (May) and 112,000 tonnes (June).

"As a refinery industry, what we are saying is that it does not make sense to import processed palm oil when we should be exporting more processed palm oil and import more CPO into the country. It does not augur well for the industry."

Indonesia produces palm olein at US$70 cheaper than that of Malaysia, which have prompted refiners in Malaysia to import the refined palm products to the tune of 100,000 tonnes a month, rather than face negative margins in converting CPO into olein.

Apart from providing feedstock for the food industry, packing plants, oleochemicals and animal feeds, the industry also provides employment and other spin-off ancillary services such as transportation, trading houses, bulking installations and financing.

Malaysia, which slipped into the No. 2 producer in the world, currently has 4.7 million ha of oil palm plantations, 410 mills, 43 crushers, 51 refineries, 18 oleochemical plants and 12 biodiesel plants.

Last year, refineries produced 24 million tonnes from the 55 refineries across the country, mostly at 50 per cent capacity which gave rise to negative margins of US$30 to US$40 a tonne.

"That kind of margins are too big and difficult to manage unlike the US$10 in the past which we can mitigate with hedging."

One market analysis projected the weak refining margins to worsen in the second half of the year when new refining capacities come onstream in Indonesia.

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