Local palm oil refiners plan to submit a comprehensive proposal to the government soon on ways to overcome high cost of crude palm oil (CPO) and stiff competition from Indonesia, which is negatively affecting the downstream activities of the domestic palm oil industry.
The plan being drawn up by the Palm Oil Refiners Association (Poram) will include seeking some form of government incentives.
“The proposal will involve a whole range of proposals that will see some give and take from industry players but more importantly, it is palatable to all — the refiners, plantations companies and smallholders,” Poram chief executive officer Mohamad Jaafar Ahmad told The Malaysian Reserve in a phone interview.
On Sept 18, The Malaysian Reserve reported that government was looking at options and incentives to help the local palm oil downstream industry weather the high CPO cost and steep competition from the neighbouring republic, which has overtaken Malaysia as the largest CPO producer in the world.
The report said industry players had told the government that if the problem persists, some of the players might be forced to relocate their downstream operations to Indonesia, a matter which was brought to the attention of Plantation Industries and Commodities Minister Tan Sri Bernard Dompok in earlier discussions.
Mohamad Jaafar said the proposal was the culmination of feedback from industry players.
In essence, he said industry players were looking for a cheaper price for their feedstock or CPO, which has risen by about 18% since early last year. CPO prices had peaked on April 1, 2011, at RM3,695 per tonne, up about 48% from early 2010, and came off its high to close at RM2,951 per tonne on Tuesday.
Meanwhile, Mohamad Jaafar said local palm oil refiners are facing a shortfall of CPO supply in the local market as the country only produces about 18 million tonnes annually compared to total refinery capacity of 23 million tonnes per year.
As such, he said refiners have to import the shortfall. As a rule of thumb, palm oil refiners have to maintain a minimum production capacity of 70% to be cost effective, which is a challenge at the moment due to the shortage.
“The shortfall has also caused some refiners to at times up their bid to ensure they get their CPO supply,” one palm oil industry executive told The Malaysian Reserve.
On average, refineries are running on negative margins due to high costs of CPO and stiff competition from Indonesia, where cost of producing CPO is much cheaper. An earlier report by The Malaysian Reserve quoted an industry executive as saying CPO prices in Indonesia is about 15% cheaper than in Malaysia.
In an earlier interview, Felda Global Group president Datuk Sabri Ahmad told The Malaysian Reserve that the local industry has been suffering step competition from Indonesian players who are enjoying cheaper CPO prices due to the tax structure.