Challenging year for palm oil refiners

Palm oil challenge

KUALA LUMPUR: Local palm oil refiners may be in for a tough year as the industry suffers from higher cost of crude palm oil (CPO) and stagnating yields.

While upstream planters have become prime beneficiaries of the present lofty CPO spot price of about RM4,000 per tonne, analysts believe Malaysian palm oil refiners may be losing out, particularly when rivals in Indonesia are enjoying a cost advantage due to a new export tax structure.

Indonesia’s present progressive export tax structure favours local refiners.

Since the export tax revisions on Dec 10,2020, Indonesian refiners have been buying CPO at about RM2,800-RM2,900 per tonne, giving them an unfair cost advantage over Malaysian refiners.

In this case, Maybank Kim Eng said integrated players in Malaysia will be better insulated from the high CPO prices compared to pure downstream players.

“(Malaysian) refinery is in over-capacity.

“There are 50 refineries in Malaysia with a combined processing capacity of 25.35 million tonnes per annum (versus Malaysia’s CPO output of 19.1 million tonnes), and running at just 64% utilisation rate, ” the research unit said in a report yesterday.

It noted that the Palm Oil Refiners Association of Malaysia (Poram) has been engaging with the government to seek further revamp in Malaysia’s export tax structure but to no avail.

Maybank added that the sector is suffering from stagnating yields, in part exacerbated by labour shortage given Malaysia’s heavy reliance on foreign workers.

“The government’s pledge to limit the planting of oil palm area to 6.5 million ha (from 5.9 million ha now) will cap the already slow area expansion in recent years, further curtailing palm oil supply growth in the medium term, ” it said. However, Poram said Malaysian refiners are not dependent on foreign workers, and hence, are not facing shortage of workers unlike estate owners.

Nonetheless, it is not all bad news for the sector as demand for palm oil products is expected to rise with the growing global population.The United Nations forecasts the world’s population to hit 9.6 billion by 2050 (+23% from 7.79 billion in 2020).

“Palm oil, being the most productive crop with highest yielding oil crop per ha, has an important role to play in food security as global consumption of 17 oils and fats is projected to swell to 318.9 million tonnes (+36% from 234.5 million tonnes now.

“Sensitivity analysis shows that to meet these extra demand of 84.4 million tonnes by 2050, the additional land use required for palm oil is the least (22 million ha) compared to rapeseed (125 million ha), sunflower (175 million ha) and soybean (222 million ha), ” it said.

While new area expansion could be limited going forward, the opportunity lies in improving yields via higher yielding seedlings, R&D, good agricultural practices, mechanisation and technology.

Poram pointed out that technology is readily available that allows refiners to comply with the European Union’s high food safety standards on 3-MCPD and GE.

Depending on the type of process improvements required, the additional cost to comply can be as low as RM2 per tonne, especially for the integrated players. Malaysian palm oil exports to the EU are already in compliance with the new stringent requirements.

Meanwhile, Poram believes government-to-government trade relation with India has improved of late but unsure when or if India will lift the restriction on import of refined palm oil.

Maybank has a “positive” recommendation on the plantations sector with preferred “buy” calls on Kuala Lumpur Kepong Bhd, Sarawak Oil Palms Bhd and Boustead Plantations Bhd.

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