The palm oil refineries in Sarawak
by Mahbob Abdullah. Posted on July 29, 2012, Sunday
The latest refinery in Malaysia was commissioned a few weeks ago in Bintulu, and it belongs to Sarawak Oil Palm Bhd, which has not owned a refinery before.
I am sure few readers have entered a refinery, because it is usually seen as a building with gates, fences, and watchmen who would turn you away. That is because the watchmen are guarding over a billion ringgit a year of crude palm oil, which would be processed, and the end products go out at an even higher value.
But with permission, you would be given a safety helmet and safety boots, and a safety briefing, and then off you go to the refinery floor where you see firstly the tankers arriving with crude palm oil.
I once worked in a refinery in Johor, for Sime Darby, and being a planter, I had to learn about the work from scratch.
The aim was to process the CPO into refined palm oil, first by removing the impurities, such as gums, and then the oil is bleached. It loses its orange colour, and then it goes to the tall deodoriser, where the free fatty acid is removed.
The result is a product called refined, bleached and deodorised palm oil, which you can sell, or use another step to separate the solids from the liquid. The oil is stirred and cooled in tanks, until it crystallises, and then passed through a high-pressure filter.
The solid stearin is separated from the liquid, and sold as a by-product. The liquid olein is the cooking oil you buy from the supermarket shelves after packing and branding. As a result of research, today there are countless other uses for all the products, including for oleochemicals that need the olein, stearin and fatty acids.
As the uses increase, the prices of all the products have gone up.
In the old days the prices of stearin and fatty acids were very low. Even if you had sold the olein, and bought your raw material, you had to find buyers fast for the other products. If you were late and the prices dropped further, you would end up with losing all the margins you had hoped to make.
The lack of marketing skills was the reason why investors were reluctant to put money in refineries, until the government gave an encouragement and incentives and put a high duty on the export of crude palm oil.
Many refineries sprang up in Pasir Gudang. In the 1970’s a refinery was built in Sandakan, and later the first refinery was built in Bintulu. The incentives worked, to such an extent that the refining capacity soon exceeded the supply of oil in Peninsular. Those who were weak or too small were edged out of existence, or found new owners.
The refinery I was looking after did not spare me from worries.
It did not give enough return. Sometimes with the fluctuations in prices of raw material, and foreign exchange rates, the slim profit would vanish, and it is common to hear from the refiners about negative margins.
To find margins, we processed palm kernel oil as well, which helped for a while because in this case the stearin got a premium, as it was used as a substitute for cocoa butter, and it went into your chocolate but without its high price. In addition we processed the palm oil shortenings that manufacturers use to make cakes, breads and biscuits.
The marketing team of young men would travel to far places, Bujumbura, Cairo, Beirut, Djibouti and Urumchi, or even places fresh from war, take the orders, and relay them back. They had to adapt to different food, customs, and languages in order to build a relationship. Getting orders would help with using up the factory capacity.
But new players would come into the market, aiming for the same customers, and margins could become very slim again.
So it is not as cosy as being in charge of a plantation. You could wake up to be told that the overnight market has dropped, or something has happened to the US dollar, the currency for exports. Changes in duties of imports or exports in certain countries would pose another challenge. I learned that what happened outside your gates were just as important as what was happening within.
I attended to the things within my control. One was on procurement, using a short-list of CPO suppliers who had a record of sending me fresh oil with high quality. It would help with my team reducing the amount of bleaching earth, less time was needed for crystallisation, and that saved on electricity. For our packed products we checked on the prices of cartons and strings. We had our margins to protect.
Later I had to get new machines, to process tailor-made products for big food companies. Once they liked what they got, they were your customers for a long time, and you could get a premium. It meant their products could stay longer on the shelves, and the tastes would stay the same. They could sell their products at a premium too.
In Sarawak and Sabah the refineries have an advantage over those in Peninsular because they can procure their crude palm oil at a lower price by about RM40 per tonne and this can give them a breathing space.
If a refinery processes about 400,000 tonnes a year, it will give an instant advantage of sixteen million ringgit. The owners of the new refinery would have worked out their strategy well and clearly, and factored in the risks such as demurrage, when the ship owners would charge for any waiting at the port caused by congestion.
There are risks of default when buyers do not want to pay if oil prices drop heavily from the prices they had agreed. You judged carefully on whom you could trust to be a big customer. Each day brings new challenges.
The owners of the new refinery at Bintulu would have a ready supply of oil for about half their refinery’s needs for next year, from their six palm oil mills. They would have to go and buy the rest from other growers, until a few years from now when they will produce virtually all the oil they would need.
In the meantime they will compete in buying oil with the other refineries in Sarawak.
Having said all that, there are upturns in the market for their products and high profits could come from opportunistic sales, when they had stocks in readiness. Refiners often had to rely on that and it could bring a smile to their faces.
But you would not catch them talking about it.
Probably all you could find would be a short note in their annual report to say their refinery was doing somewhat better than usual, which had contributed to the overall performance of the business.
By then it would be likely that the owners would want to expand their capacity, or build another refinery. They would be looking for more plant managers, accountants and buyers.
They would need more people in sales and marketing, who do a lot of travelling.
But you would not find out where they go, and if you met them at the airport, usually what they could say would be:
“Business is tough. We are doing just enough to survive.”
“Where are you going?”
“Oh, a few places.”
There is no point to ask any more. They have their markets to protect.