Sarawak Oil Palms rides out global storm

The 2013 change of palm oil tax structure gave breathing space to refiners in Malaysia. Sarawak Oil Palms Bhd’s recent downstream venture turned the corner and is now running at full capacity. Ooi Tee Ching writes.

MIRI: The Year of the Dragon is considered the luckiest of the Chinese lunar years. But last year,  the auspicious creature was not kind at all to Malaysia's palm oil industry. 

In fact, stakeholders throughout the palm oil value chain took a very bad beating. Oil palm planters suffered falling palm oil prices while refiners bled losses when they tried to export refined palm oil.

The dismal sentiment was very much fuelled by the Indonesian government's policy move in October 2011 to widen its export tax gap between crude palm oil (CPO) and refined products drastically.

Decades-old partnerships between millers and refiners in Malaysia broke down. It was an unavoidable move as refiners were bleeding losses for every tonne of CPO refined. To stem refining losses, refiners here unwound long-term contracts and slowed down purchases, resulting in a rapid build-up of CPO inventories. 

This, in turn, caused CPO and crude palm kernel oil prices to fall throughout 2012. With cheap CPO and low duty export for packed products, Indonesian exporters were able to sell their products at much lower price, thus grabbing market share from refiners in Malaysia.

Among more than 50 refineries in Malaysia hit was Miri-based Sarawak Oil Palms Bhd (SOPB), a newcomer.

"Our new refinery in Bintulu commenced operations in July 2012. It was very challenging and painful. The tax structure then made it totally uncompetitive. We were only operating at half capacity then," said group financial controller Eric Kiu Kwong Seng.

Refiners also balked at the Malaysian government's surprising move in allowing more duty-free CPO exports in mid-2012. As expected, refiners had to contend with loss of market potential for refined oil.

However, after more than a year of laborious and vociferous lobbying for the restructure of palm oil taxes and waiver of duty-free CPO exports from Malaysia, refiners here finally get to compete on a more level playing field.

In January this year, the government abolished duty-free CPO exports and lowered the export tax from 23 per cent to between 4.5 per cent and 8.5 per cent, depending on the palm oil prices. 

When prices hover between RM2,250 and RM2,400 a tonne, the tax is 4.5 per cent. And if the palm oil prices jump to RM3,450 per tonne, the tax is 8.5 per cent.

Following this new tax regime, SOPB has started to see better refining margins. "We stand a better chance to buy up more CPO from the mills as we incrementally ramp up our refinery," Kiu told Business Times in an interview in Miri, Sarawak.

Indeed, data from the Malaysian Palm Oil Board showed that the national CPO stock levels have consistently come down in the last five months to 1.8 million tonnes.

"There's a steady flow of crude palm oil coming from the surrounding estates. Our refinery is now running at full capacity," said Kiu.

As stock levels come down, palm oil prices have started to climb. Yesterday, the third month benchmark palm oil futures on Bursa Malaysia Derivatives market rose RM26 to close at RM2,464 per tonne.

In view of increased palm oil demand from the Muslim world ahead of Ramadhan next month, prices are expected to trade in a more volatile bandwidth. Kiu said SOPB's team of traders are hedging back to back to protect against drastic fluctuation in price.

Moving on to SOPB's upstream business, Kiu said the group expects to harvest one million tonnes of fresh fruit bunches, 15 per cent more than last year's 883,000 tonnes. 

As of March 2013, about 24 per cent of its planted area is of prime fruit bearing ages. "As more young trees mature, we expect very good harvest prospects. By the end of this year, about 30 per cent of our total planted area will be of matured ages and bearing more fruit bunches," he said.

SOPB's aggressive plantings in 2007 have resulted in 80 per cent of its planted area consisting of young oil palms and primed to bear more fruit bunches. This means big earnings growth potential in the next five years. To date, SOPB has planted more than 85 per cent of its 75,155ha land bank.

This year, SOPB is spending some RM200 million on the construction of its fifth and sixth mill at Sebauh and Baram.

SOPB was set up in 1968 via a joint venture between Commonwealth Development Corp (CDC) and the Sarawak state government. In 1995, conglomerate Shin Yang Group bought CDC's entire stake. Now, Shin Yang Group is the largest shareholder with 36.5 per cent, while state-owned Pelita Holdings Sdn Bhd holds 28.9 per cent.

Keeping an eye on the less fortunate

MIRI: As one of the pioneering oil palm planters in Sarawak, Sarawak Oil Palms Bhd (SOPB) has set out to be a good role model as it takes on its corporate social responsibilities seriously.

One of its heart-warming initiatives is the Vision Care Programme which saw the provision of eye health check-up services to villagers staying near its estates.

In a recent visit to the hinterland village of Sg Arang at Baram, some 200 village folks received free eye check-ups by medical practitioners brought in by SOPB. Spectacles were also provided free of charge to those who were certified as short-sighted by an optometrist. 

Elderly folks diagnosed with eye cataract problems were subjected to further medical review and surgery at Miri Hospital, also fully funded by SOPB.

"It has been a humbling experience serving villagers in the interiors," said Dr Wan Mohd Hafidz, 36, who was recently transferred from Selayang Hospital to Miri Hospital. He noted that since the villagers in the interiors experience more direct exposure to sunlight, there are quite a few who are diagnosed with pterygium, a benign growth of the conjunctiva.

"Cataract is also very common among elderly folks. Surgery and hospitalisation ranges from RM50 to RM1,000, depending on the severity of cases. So, it's good that SOPB steps in to help out those who cannot afford medical fees," Dr Wan Mohd added.