OUTLOOK FOR MALAYSIAN PALM OIL REFINERIES IN CHALLENGING TIMES

MOHAMMAD JAAFFAR AHMAD 4TH PALM OIL SUMMIT THE AYODYA RESORT BALI 9-10 JULY 2012

OUTLINE OF PRESENTATION
INTRODUCTION TO PORAM
PALM OIL REFINING INDUSTRY IN MALAYSIA CHALLENGES FACED BY THE INDUSTRY SOLUTIONS BEING OFFERED OUTLOOK FOR MALAYSIAN PALM OIL REFINERIES

INTRODUCTION TO PORAM
the beginning of a value added industry

INTRODUCTION TO PORAM
Formed in 1975, primarily to present a representative voice to the Malaysian Government and the trade in all matters related to the Palm Oil Industry.
A voluntary and non-profit organization.

Although its principal role lies in the promotion of the industry, PORAM fully subscribes to the philosophy of fair trading practices, which it has pursued with a good measure of success.

ROLES AND FUNCTIONS

SERVICES TO MEMBERS
1

Information Dissemination Government Interaction/ Representation

Trade Facilitation

Trade/Export Promotion

Training / Courses

Trade Dispute Resolution

PALM OIL REFINING INDUSTRY IN MALAYSIA

the workhorse of the palm oil industry

THE PALM OIL REFINING INDUSTRY

Prior to 1975, 10% of the CPO production was refined by a handful of refiners (Lam Soon (M) Berhad, Lever Brothers S/B and Senawang Edible Oils S/B) mainly focusing on domestic demand i.e. a market dominated by coconut and groundnut oils. The rest of CPO production were exported to the EEC, Japan, USA and Australia. Palm oil refining proper started in 1975. By 1977, 23 refineries were in operation, largely driven by incentives and promotion of the industry by the Government.

THE PALM OIL REFINING INDUSTRY

The rapid increasing of palm oil refining and fractionation capacities in the 1980s consolidated Malaysias position as a leading producer and exporter of palm oil in the world.

Today, many refineries are associated with oil palm plantation and milling sectors or both, whilst some have tied up with manufacturers of specialty fats and oleochemicals.
Today, processed and refined palm oil account for almost 85% of the countrys total palm oil exports.

THE IMPORTANCE OF THE REFINING SECTOR

Is the workhorse of the industry It generates tremendous benefits in terms of industrialization to the country, namely; Provides huge outlet for the CPO, in the form of processed oils

1.

2.

Provides feed-stocks for food industry, packing plants, oleochemicals, animal feeds, etc.
Generates employment and other spin-off ancillary services e.g. transportation, trading houses, bulking installations, financing, etc.

3.

MALAYSIAN PO & PKO PRODUCTION & EXPORT (MT) FROM 1975 TO 2010
PALM OIL PALM KERNEL OIL PRODUCTION EXPORT PRODUCTION EXPORT 1,257,573 93% 108,260 100% 2,573,173 88% 222,285 98% 4,134,463 83% 511,908 52% 6,094,622 94% 827,233 83% 7,810,546 83% 1,036,538 37% 10,842,095 83% 1,384,685 37% 14,961,654 90% 1,842,628 46% 16,993,717 98% 2,014,942 57%
2011 PO Production 18.91 mil. PKO Production 2.14 mil. Export 95% Export 54%

1975 1980 1985 1990 1995 2000 2005 2010

Note: * 5 Year Incremental Increase Source: MPOB

NUMBER OF REFINERIES AND CAPACITIES IN 2011 (TONNES/YEAR)

State Johor Perak Selangor Others Peninsular Malaysia In Operation No. Capacity 17 4 11 5 37 7,016,400 1,039,500 3,684,000 2,326,500 14,066,400 Under Planning* No. Capacity 2 1 2 2 7 1,080,000 965,000 1,350,000 214,000 3,609,000 Total Capacity 8,096,400 2,004,500 5,034,000 2,540,500 17,675,400

No 19 5 13 7 44

Sabah
Sarawak Sabah/Sarawak

13
5 18

7,669,500
2,242,000 9,911,500

15
3 18

5,522,300
834,000 6,356,300

28
8 36

13,191,800
3,076,000 16,267,800

MALAYSIA
Source : Note :

55

23,977,900

25

9,965,300

80

33,943,200

MPOB *License has been issued by MIDA

MALAYSIAN REFINING CAPACITY AND UTILISATION RATE

CHALLENGES FACED BY THE INDUSTRY

competitiveness against Indonesia

ISSUES CONFRONTING THE REFINERY

1.

Indonesian export duty structure that give advantage to export of processed oils

2.

EU import tax structure that gives advantage to import of CPO (3.8%) and disadvantage to processed oils (9%)
Indonesian CPO is selling at a discount Malaysian CPO price is artificially held up caused by the export of duty-free CPO

3. 4.

KEY CHANGES IN EXPORT TAX FOR MAJOR PALM PRODUCTS

EXPORT TAX GAP BETWEEN KEY PALM PRODUCTS AND CPO UNDER OLD AND NEW TAX REGIMES

Calculation for Indonesian CPO FOB Basis : Based on new structure which has been implemented 14th September 2011 onwards
1. Calculation for Indonesian CPO FOB Basis: Indonesian local CPO, for May 2012 delivery: ( PTP Tender in Belawan/Dumai/Medan ) Less: 10 % VAT = CPO local price in IDR/Kg: Convert to USD: IDR/kg / 9,189 1.1 8,354 Msian local CPO = RM/mt / {IDR/USD} 9,230 3,360

Indonesia local CPO =

USD

905

RM/USD 3.0560 = 2,766

Convert to per mt: Indonesian Local CPO price ( Equivalent in USD/mt): Add: Fobbing:
CPO Export Duty for May 2012 shipment ( 19.5 % ) CPO FOB Indonesia:

X
USD/mt

1,000
905 Indonesia local CPO

USD/mt
USD/mt USD/mt

5
218.40 1,128

Price advantage:

RM/mt
USD/mt

594

194

Calculation for Indonesian RBD Palm Olein FOB Basis : Based on new structure which has been implemented 14th September 2011 onwards
2

Calculation For Indonesian RBD Palm Olein FOB Basis:

Indonesian local CPO in USD/mt, for May 2012 delivery: Add: Current market differential between Malaysian FOB RBD Palm Olein vs Malaysian local delivered CPO ( equivalent to RM 85/mt ): Add: Fobbing: Add: RBD Palm Olein Export Duty (10 % ): ( a ) Indonesian RBD Palm Olein FOB: USD/mt USD/mt USD/mt 28.0 5 938 115.10 1,053.00 (a) USD/mt USD/mt 905

( b ) Malaysian RBD Palm Olein FOB:

Comment: Indonesian RBD Palm Olein FOB has cost advantage vs that of Malaysian's [ (b) - (a) ]:

USD/mt

1,127.50

(b)

USD/mt

74

INDONESIAN REFINERS MARGIN ADVANTAGE OVER MALAYSIAN REFINERS

LOSS OF REVENUE TO THE ECONOMY

YEAR 2 011 2010 2009 2008 2007 EXPORT (MIL. TONNES) 3.47 2.73 2.53 2.33 1.93 AVERAGE PRICE (RM) 3,218 2,704 2,244 2,777 2,530 EXPORT DUTY (%) LOSS REVENUE (RM BILLION) 22% 22% 22% 22% 22% 2.45 1.62 1,24 1.42 1.07

TOTAL

12.99

7.80

In Indonesia, all CPO export has to be taxed to protect and expand their downstream capacity and collect revenue Malaysia has excess capacity and strong justification to keep CPO for own downstream industries Every tonne export of CPO will mean loss of market potential for a tonne of processed oils

RISING EXPORTS OF CPO IN RECENT YEARS DUE TO THE CPO TAX-FREE QUOTA

SOLUTIONS OFFERED
the need for level playing field

INDONESIA VS MALAYSIA PALM OIL EXPORT (MT) FROM 1975 TO 2010

% INDONESIA INCREASE* 386,000 511,000 32% 652,000 27% 1,163,000 78% 1,855,600 59% 4,140,000 123% 10,436,000 152% 16,450,000 57% MALAYSIA 1,172,926 2,271,222 3,434,025 5,727,451 6,512,956 9,081,553 13,445,511 16,664,068 % INCREASE* 93% 51% 66% 13% 39% 48% 24%

1975 1980 1985 1990 1995 2000 2005 2010

Source: Malaysia (MPOB) Indonesia (Oil World)

Note: * 5 Year Incremental Increase ** Estimate

IMPORT OF PALM OIL TO SELECTED MAJOR DESTINATIONS (MILLION MT) FROM 2006 - 2011
CHINA PR FRM MSIA FRM INDO EU 27 FRM MSIA FRM INDO PAKISTAN FRM MSIA FROM INDO INDIA FRM MSIA FROM INDO 2006 5.46 3.57 1.93 4.59 2.58 2.01 1.76 0.96 0.40 3.19 0.56 2.62 2007 5.49 3.72 1.69 4.65 2.06 2.00 1.73 0.99 0.74 3.69 0.51 3.12 2008 5.59 3.65 1.91 5.29 2.05 2.59 1.85 1.29 0.56 5.75 0.98 4.68 2009 6.55 3.97 2.58 5.85 1.82 3.12 1.93 1.70 0.22 6.83 1.54 5.26 2010 5.80 3.45 2.33 5.87 2.05 3.08 2.01 1.92 0.09 6.65 1.19 5.44 2011 6.17 3.81 2.35 5.46 1.94 2.50 2.01 1.75 0.26 6.74 1.68 5.01 % Inc. 13% 6% 21% 19% -25% 24% 14% 82% -35% 111% 200% 91%

Source : Oil World 2012

Note: % Increase 2011 vs 2006

MALAYSIAN POLICY OPTIONS

NO CHANGES IN POLICY Maintain CPO Export Duty Free Quota No export duty on processed palm oil products POSSIBLE IMPACT Negative refining margins Independent refiners will close down/relocate Plantation based refiners will leverage position Increase CPO Export Duty Free Quota

MALAYSIAN POLICY OPTIONS

FOLLOW / MIMIC INDONESIAN DUTY STRUCTURE Match the full structure of Indonesian duty Improvised Malaysian CPO export duty structure POSSIBLE IMPACT Neutralized the advantages enjoyed by Indonesia Improved refining margins in Malaysia Strengthen value addition activities Provide confidence to independent refiners Resistance by Malaysian plantation companies

MALAYSIAN POLICY OPTIONS

PROVIDE SUBSIDY TO THE MALAYSIAN REFINERS Support local refiners margins Create a level playing field on feed-stocks price POSSIBLE IMPACT Government to suffer financially Price distortion in the market Breaching of WTO rules Earnings of smallholders will be affected Politically un-popular

OUTLOOK FOR MALAYSIAN PALM OIL REFINERIES

win-win strategies

MALAYSIAN PO AND PKO PRODUCTS EXPORT FROM 2009 TO 2011 (MIL. MT)
2009 2.53 2.13 7.48 1.58 0.90 0.57 0.18 0.34 0.09 0.13 2010 2.73 1.81 8.21 1.73 0.87 0.54 0.18 0.34 0.14 0.15 2011 3.47 1.55 9.00 1.78 0.78 0.64 0.20 0.36 0.13 0.13
* Based on 17.22 mil.MT ** Based on 0.82 mil. MT

CRUDE PALM OIL RBD PALM 0IL RBD P OLEIN RBD P STEARIN COOKING OIL PFAD CRUDE PKO RBD PKO RBD PK STEARIN RBD PK OLEIN

% 20%* 9%* 52%* 10%* 4.5%* 3.7%* 24%** 44%** 16%** 16%**
Source: MPOB

Value Added + +++ Co-product +++ By-product ++ +++ Co-product

Note: RBD - Refined Bleached and Deodorized PFAD - Palm Fatty Acid Distillate PKO - Palm Kernel Oil PK - Palm Kernel P - Palm

WILL REFINING MARGINS WORSEN?

WHAT CAN STANDALONE REFINERS DO TO TACKLE THE PROBLEM?

BREAKDOWN OF MALAYSIA REFINING CAPACITY IN 2009

MY VIEWS

IF EVERYTHING IS STATUS QUO Independent refiners will relocate to Indonesia Plantation based companies (GLC) will be pressured to take-up refining capacity Malaysia will export more CPO WHAT WILL INDONESIA GAIN ? Competition among new refineries will put upward pressure on Indonesian CPO prices Intense focus on sustainability and environment

WITH GREAT POWERS COME GREAT RESPONSIBILITIES

Thank You Very Much

1 Palm Oil, Thousand of Uses, Millions Satisfied

The Palm Oil Refiners Association of Malaysia (PORAM)

Tel. No : +603-7492 0006 Fax No : +603-7492 0128 E-mail : poram@poram.org.my Website : www.poram.org.my