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.

Information Dissemination

Government Interaction/ Representation

Training / Courses

1

2

3

ROLES AND FUNCTIONS

SERVICES TO MEMBERS

Trade Facilitation

Trade/Export Promotion

Trade Dispute Resolution

4

5

6

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 1980’s consolidated

Malaysia’s 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 country’s 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;

1. Provides huge outlet for the CPO, in the form of

processed oils

2. Provides feed-stocks for food industry, packing

plants, oleochemicals, animal feeds, etc.

3. Generates employment and other spin-off

ancillary services e.g. transportation, trading

houses, bulking installations, financing, etc.

MALAYSIAN PO & PKO PRODUCTION

& EXPORT (MT) FROM 1975 TO 2010

PALM OIL PALM KERNEL OIL

PRODUCTION EXPORT PRODUCTION EXPORT

1975 1,257,573 93% 108,260 100%

1980 2,573,173 88% 222,285 98%

1985 4,134,463 83% 511,908 52%

1990 6,094,622 94% 827,233 83%

1995 7,810,546 83% 1,036,538 37%

2000 10,842,095 83% 1,384,685 37%

2005 14,961,654 90% 1,842,628 46%

2010 16,993,717 98% 2,014,942 57% Note: * 5 Year Incremental Increase 2011

Source: MPOB PO Production 18.91 mil. Export 95%

PKO Production 2.14 mil. Export 54%

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

State In Operation Under Planning* Total

No. Capacity No. Capacity No Capacity

Johor 17 7,016,400 2 1,080,000 19 8,096,400

Perak 4 1,039,500 1 965,000 5 2,004,500

Selangor 11 3,684,000 2 1,350,000 13 5,034,000

Others 5 2,326,500 2 214,000 7 2,540,500

Peninsular Malaysia 37 14,066,400 7 3,609,000 44 17,675,400

Sabah 13 7,669,500 15 5,522,300 28 13,191,800

Sarawak 5 2,242,000 3 834,000 8 3,076,000

Sabah/Sarawak 18 9,911,500 18 6,356,300 36 16,267,800

MALAYSIA 55 23,977,900 25 9,965,300 80 33,943,200

Source : MPOB

Note : *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%)

3. Indonesian CPO is selling at a discount

4. Malaysian CPO price is artificially held up

caused by the export of duty-free CPO

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: Indonesia local

CPO = USD 905

Indonesian local CPO, for May 2012 delivery: RM/USD 3.0560

( PTP Tender in Belawan/Dumai/Medan ) IDR/kg 9,189 = 2,766

Less: 10 % VAT / 1.1

= CPO local price in IDR/Kg: 8,354 Msian local CPO = RM/mt 3,360

Convert to USD: / {IDR/USD} 9,230

Convert to per mt: X 1,000

Indonesian Local CPO price ( Equivalent in

USD/mt): USD/mt 905

Indonesia local

CPO

Add: Fobbing: USD/mt 5 Price advantage: RM/mt 594

CPO Export Duty for May 2012 shipment ( 19.5 % ) USD/mt 218.40 USD/mt 194

CPO FOB Indonesia: USD/mt 1,128

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: USD/mt 905

Add: Current market differential between Malaysian USD/mt

FOB RBD Palm Olein vs Malaysian local delivered CPO

( equivalent to RM 85/mt ): 28.0

Add: Fobbing: USD/mt 5

938

Add: RBD Palm Olein Export Duty (10 % ): USD/mt 115.10

( a ) Indonesian RBD Palm Olein FOB: USD/mt 1,053.00 ( a )

( b ) Malaysian RBD Palm Olein FOB: USD/mt 1,127.50 ( b )

Comment: Indonesian RBD Palm Olein FOB has

cost advantage vs that of Malaysian's [ (b) - (a) ]: USD/mt 74

INDONESIAN REFINERS MARGIN ADVANTAGE OVER MALAYSIAN REFINERS

LOSS OF REVENUE

TO THE ECONOMY

YEAR EXPORT

(MIL. TONNES)

AVERAGE

PRICE (RM)

EXPORT DUTY (%) LOSS REVENUE

(RM BILLION)

2 011

2010

2009

2008

2007

3.47

2.73

2.53

2.33

1.93

3,218

2,704

2,244

2,777

2,530

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* MALAYSIA %

INCREASE* 1975 386,000 - 1,172,926 - 1980 511,000 32% 2,271,222 93% 1985 652,000 27% 3,434,025 51% 1990 1,163,000 78% 5,727,451 66% 1995 1,855,600 59% 6,512,956 13% 2000 4,140,000 123% 9,081,553 39% 2005 10,436,000 152% 13,445,511 48% 2010 16,450,000 57% 16,664,068 24%

Source: Malaysia (MPOB) Note: * 5 Year Incremental Increase

Indonesia (Oil World) ** Estimate

IMPORT OF PALM OIL TO SELECTED

MAJOR DESTINATIONS (MILLION MT)

FROM 2006 - 2011

2006 2007 2008 2009 2010 2011 % Inc.

CHINA PR 5.46 5.49 5.59 6.55 5.80 6.17 13%

FRM M’SIA 3.57 3.72 3.65 3.97 3.45 3.81 6%

FRM INDO 1.93 1.69 1.91 2.58 2.33 2.35 21%

EU 27 4.59 4.65 5.29 5.85 5.87 5.46 19%

FRM M’SIA 2.58 2.06 2.05 1.82 2.05 1.94 -25%

FRM INDO 2.01 2.00 2.59 3.12 3.08 2.50 24%

PAKISTAN 1.76 1.73 1.85 1.93 2.01 2.01 14%

FRM M’SIA 0.96 0.99 1.29 1.70 1.92 1.75 82%

FROM INDO 0.40 0.74 0.56 0.22 0.09 0.26 -35%

INDIA 3.19 3.69 5.75 6.83 6.65 6.74 111%

FRM M’SIA 0.56 0.51 0.98 1.54 1.19 1.68 200%

FROM INDO 2.62 3.12 4.68 5.26 5.44 5.01 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 2010 2011 % Value Added CRUDE PALM OIL 2.53 2.73 3.47 20%* -

RBD PALM 0IL 2.13 1.81 1.55 9%* + RBD P OLEIN 7.48 8.21 9.00 52%* +++

RBD P STEARIN 1.58 1.73 1.78 10%* Co-product

COOKING OIL 0.90 0.87 0.78 4.5%* +++ PFAD 0.57 0.54 0.64 3.7%* By-product

CRUDE PKO 0.18 0.18 0.20 24%** - RBD PKO 0.34 0.34 0.36 44%** ++

RBD PK STEARIN 0.09 0.14 0.13 16%** +++ RBD PK OLEIN 0.13 0.15 0.13 16%** Co-product

Note: Source: MPOB

RBD - Refined Bleached and Deodorized * Based on 17.22 mil.MT

PFAD - Palm Fatty Acid Distillate ** Based on 0.82 mil. MT

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