Palm oil refinery capacity in Malaysia, the No 2. producer of the vegetable oil, is likely to remain flat at 19.2 million tonnes next year as some refiners tread cautiously in a constricted global credit market after years of expansion, a top industry body said on Tuesday.
Despite the deepening global recession, the Southeast Asian nation may see utilisation rates of its refineries inching higher as appetite for the cheap vegetable oil persists amid a supply build-up, Yong Chin Fatt, chairman of the Palm Oil Refiners Association of Malaysia (PORAM), said.
PORAM groups most of the 50 refineries located in peninsular Malaysia and the eastern state of Sabah on Borneo island. "For 2009, I don't see any refineries coming up," Yong told Reuters in an interview. "I expect the refinery capacity to be more or less the same. With the credit crisis, people would tend to be more cautious, its only natural."
Only Sime Darby, the world's largest listed palm planter in terms of plantation land, was building a new plant this year to process 2,000 tonnes of crude palm oil per day, but the job is expected to be completed in mid-2010. Industry consolidation in recent years was fuelled by the commodity boom, led by the merger of unlisted commodities trader Kuok and Singapore-listed Wilmar, and more recently the merger of oil palm firms Kumpulan Guthrie and Golden Hope Plantations with Sime Darby has seen refinery capacity rise.
Rapid expansion orchestrated by the Malaysian government to expand export markets in the 1980s led to excess capacity. But since early in the decade, growing supplies and soaring global demand for palm oil have seen utilisation rates rise above 80 percent and lead to more of a balance in capacity, Yong said.
"Our refineries' utilisation is still quite high. Of course, our local supply has been supplemented by cheaper imports from Indonesia and Thailand. This year, imports have been quite high," Yong said, adding that run rates stood at 87 percent for the first five months of this year versus 82 percent for 2007.
Crude palm inventories in Malaysia climbed 6.9 percent to a record in October as production remained in full swing. And Malaysia expects crude palm oil production to be 17.5 million tonnes in 2008. "Utilisation rates could possibly increase in 2009, since demand for palm oil is always growing every year but for refiners it ultimately depends on the margin, which has been slightly positive for the past 14 months of volatility," Yong said.
Traders say Malaysian refineries make good margins as long as exports of palm oil products are above 1 million tonnes, a level achieved for the year so far. Cargo surveyor Societe Generale reported exports totalling 1.3 million tonnes last month.
Yong said the possibility of defaults by top Asian buyers China, India and Pakistan in the coming months was low because crude palm oil prices were so low. The price of palm oil, used in products from biscuits to biofuel, has plummeted two-thirds from March's record peak of 4,486 ringgit on defaults and ballooning stocks amid tighter credit conditions.
"It has been difficult to manage but most of our refinery members actually work with their customers to reschedule shipments and there are deferments in some cases. Sometimes there are big discounts given as well," Yong said. Since August, steep price falls in the tropical oil have seen India and China cancel or renegotiate more than 1.5 million tonnes of palm oil deals, Southeast Asian traders have said.