KUALA LUMPUR: Malaysian palm oil refiners are facing thinning margins and underutilized capacities, as market supplies of crude palm oil (CPO) tighten in a high price environment, say industry players.
Current low supplies of the tropical oil have been rallying benchmark palm prices, which surged to a five month high of 2,728 ringgit on Wednesday before trading around 0.6 percent higher at 2,708 ringgit ($652) per tonne in the afternoon.
Refiners, who buy CPO to refine it into products like palm olein, stearin and fatty acid distillates (PFAD), have already long called for a restructuring of Malaysia’s CPO export tax to improve their margins against their Indonesian counterparts.
Indonesian refiners enjoy an advantage as their $50-a-tonne levy on CPO exports keeps more CPO at home, pulling down domestic prices and improving downstream margins.
“CPO availability is tight, so refiners have been struggling. Refining capacity is underutilized,” said a Malaysian trader with a plantations company, estimating his refinery’s utilization rate at 55-60 percent.
“Capacity has been reduced but nothing much can be done there.” Palm oil has seen tightness in recent weeks as output remains impacted by the lingering effects of a crop damaging El Nino weather event.
Malaysian production has been rising in line with seasonal trend, but output has been lower on a yearly basis. Production in August rose 7.3 percent from July to 1.70 million tonnes, but were its lowest August levels since 2012. Indonesia, whose palm crops are also impacted by the El Nino, has also been buying CPO from Malaysia to make up for a supply deficit, contibuting to the tightness in the local market, said a local refiner based in the southern region of Peninsula Malaysia.
“In looking at the tightness, it might last until November and only ease in December, as exports would be lower then.” Demand for palm oil usually slows among top consumers China and India towards the year-end, as colder temperatures solidifies palm oil and makes it less appealing to buyers.
“However, when refiner’s margins get squeezed, fewer refined products will be available and prices will become high. This will be another incentive for them to keep running,” said the refiner. ($1 = 4.1560 ringgit)
