Top Palm Oil Producer Indonesia Wants to be More Refined
For decades, Indonesia has shipped out tanker loads of raw palm oil for processing into higher value cooking oil and margarine in Rotterdam, Mumbai and Kuala Lumpur.
Now, the world’s No. 1 producer of the edible oil is seeing a more than US$2.5 billion wave of investment to build a refining industry that will double its capacity and mean it could supply the entire needs of Asia’s top food consumers – India and China.
The transformation – driven by Indonesia’s move to slash export duties for processed oil last October – will heat up competition with rivals such as Malaysia and send ripples through the palm oil market as new supply pressures prices of traded refined products such as palmolein, used as cooking oil.
A Reuters survey of 30 firms operating in Indonesia – from the world’s biggest listed palm oil firm Wilmar to conglomerate Unilever – shows plans to nearly double refining capacity to 43 million metric tonnes of palm oil, or 80 per cent of total world output.
“The government is sending a clear message – to survive, you need a refinery. So the palm oil firms are putting their money out and following the big guys in the industry who have already done so,” said Thomas Mielke, an analyst at industry publication Oil World.
“There is the threat of over capacity. But palm oil firms with the whole supply chain behind them, we are talking about having plantations to mills and ports, will be the kings.”
Gleaming silver storage tanks standing ten-storeys’ high are becoming a feature of Indonesia’s landscape as more refineries spring up, threatening the stranglehold on processing held by neighbouring Malaysia, the No.2 palm oil producer.
At a newly built refinery near Jakarta, staff wearing face masks and hair caps work on conveyor belts carrying boxes of margarine and cooking oil.
The US$249-million Marunda plant run by PT SMART was launched before the tax change and Indonesia’s top palm oil firm plans to spend a further US$200 million on new refining capacity despite the infrastructure issues it faced building Marunda.
PT SMART will be one of the biggest investors in the sector along with Wilmar and unlisted Musim Mas, which plans to spend US$860 million, according to the survey.
Government officials in Malaysia and Indonesia say these firms had aggressively lobbied Jakarta to cut duties on refined palm oil to half those levied on crude.
Much of the expansion is led by companies owned by powerful tycoons in Indonesia. SMART is controlled by the family of Eka Tjipta Widjaja, who created a palm oil empire from his humble start selling biscuits from a rickshaw.
Foreign firms are not far behind. Commodities trader Louis Dreyfus formed joint ventures with planters such as Singapore-listed Kencana Agri to build refineries in Indonesia.
Until now, Indonesia had focused on expanding plantations. Oil palms cover roughly 8.2 million hectares, an area about the size of the island of Ireland, and their cultivation is often blamed for rainforest destruction.
Palm oil, the world’s most traded and consumed edible oil, is used mainly as an ingredient in food such as biscuits and ice cream, or as a biofuel.
For decades, refined palm olein enjoyed premiums of 5-10 per cent over crude palm oil futures.
But with more Indonesian supplies coming on stream, more inefficient refining operations could get shut.
On the flip side, greater competition could cut final product costs to the benefit of consumers in India and China, where food inflation is a constant concern for policy makers.
So far this year, palm olein prices have fallen nearly 10 per cent on higher Indonesian supplies.
Under its refining plans, Indonesia could meet domestic needs of around 10 million metric tonnes annually as well as supplying the combined 20 million metric tonnes of edible oil imports required by top buyers China and India.
Indonesia’s crude palm oil output – estimated at 23 to 25 million metric tonnes in 2012 – looks set to be outpaced by the planned increase in refining capacity in the next two years.
That means some palm oil firms may build refineries run at lower capacities until more edible oil supply comes in.
DBS analyst Ben Santoso said latecomers to Indonesia’s refining business could see margins squeezed to US$40 per tonne from US$70, although still healthier than its main competitor.
“The capacity of some of these smaller companies will turn idle. But let’s not forget, Malaysia’s refining margin is just US$9 to US$10 a tonne,” he added.