Sources Malaysian palm oil refiners cut output on tight feedstock supply

Sources Malaysian palm oil refiners cut output on tight feedstock supply
Business & Markets 2014
Written by Reuters
Friday, 21 March 2014 16:20

* Some plants running at half their capacity
* Two plants in Pasir Gudang may temporarily shut next week
* Malaysian refineries unlikely to remain closed for long

KUALA LUMPUR (March 21): Malaysian palm oil refiners are cutting production with some plants running at half their capacity as a two-month drought across the Southeast Asian country has reduced feedstock availability, trade sources said.

Lower output of processed palm oil products such as refined palm olein and palm stearin could tighten supplies for top buyers India, China and Europe.

"None of the refineries are running at full capacity," said a trader whose firm owns a 2,000-tonne a day plant in the state of Johor, which produces a fifth the country's palm oil.

"Even if you are ready to pay higher price you cannot get the crude palm oil."

Malaysian palm oil futures climbed almost 10 percent in February and touched an 18-month high of 2,916 ringgit ($880) on March 11 as inventories fell sharply.

February palm oil end-stocks in Malaysia, the world's No. 2 producer, sank to an eight-month low of 1.66 million tonnes as unfavourable weather curbed output.

Palm oil prices could rise faster than expected and hit 3,000 ringgit in April if the El Nino weather pattern returns and curbs yields further, leading analyst Dorab Mistry said.

The supply situation is so tight that two plants in Pasir Gudang with a daily combined capacity of 2,000 tonnes may temporarily shut operations as early as next week, a Kuala Lumpur-based trader said.

Located in Johor, Pasir Gudang is home to one of the world's largest ports handling palm oil shipments.

"Some refiners are contemplating shutting their plant because they're not getting sufficient raw material," a second trader with a commodities brokerage in Kuala Lumpur said. "If they close the plant, it will create tightness in the market."

Shutting plants, but not for long

In addition to the two plants in Pasir Gudang that are likely to close, an official with a Wilmar-linked refinery said one of its units will likely be shut at end-March for a week if the shortage drags on.

"Temporarily, yes, as we have shortage of crude palm oil," said the official, adding that the refinery has been running at only 55 percent of its capacity since February.

Closure of refining plants would boost prices of processed palm oil, including refined palm olein which is used as cooking oil and is also an ingredient to make food products ranging from cookies, chocolate and ice cream.

Indonesia, the world's top palm oil producer, is also likely to see lower output from April onwards as a result of the dry weather, said an official at one of the country's leading producers. Haze from raging forest fires caused by illegal land clearing and dry weather could delay the harvest as well.

While rains over most parts of Malaysia last week ended the crop-damaging dry spell, planters said March's palm output will still be hurt as drier conditions earlier had hindered growth of fresh fruit bunches.

Malaysia received only 60-70 millimetres of rain in the first two-and-a-half months this year, compared with the usual 350-400 millimetres.

Malaysian refineries are, however, unlikely to remain closed for long, an industry official said.

"It won't be catastrophic unless refineries close for more than one month, which is impossible," said Mohammad Jaaffar Ahmad, chief executive of Palm Oil Refiners Association of Malaysia. "They won't do a complete shutdown because there's a lot of cost incurred."

($1 = 3.2965 Malaysian Ringgit)