Plantations Sector - Govt to set up independent consortium of refiners? OVERWEIGHT

- The Star newspaper cited sources as saying that a proposal to set up a Consortium of Independent Producers and Refiners of Malaysia (CIPROM) is being deliberated as one of the strategies under the Government’s palm oil industry reforms. 

- The source said that CIPROM is one way that the Malaysian Government can counter the Indonesian low palm oil export duty regime, which has made local independent palm oil refiners uncompetitive. 

- The idea would be to link independent local palm refiners especially those without upstream activities with independent CPO producers in a consortium and for them to sell as “a marketing agent”.

- According to the source, toll refinery return will be on cost plus basis (refining cost plus margin), which can keep the refineries fully-utilised. Furthermore, growers could also cross subsidise refiners by supplying CPO at RM500 lower than market price. By opting for CIPROM, the Government would not need to abolish the duty-free CPO export quota and reduce the CPO export duty structure.

- By setting up CIPROM, the Government has not imposed any additional cess or tax on the upstream players directly. Instead, it is up to the upstream players to decide how much price discount they would like to give to the palm oil refiners. 

- We believe that the party with the stronger bargaining power would be able to dictate prices. During periods of oversupply, we reckon that the refiners would have the upper hand. They would be able to request for a larger price discount. 

- However during periods of tight supply, the upstream players would be able to sell CPO at prices closer to spot. Currently, most upstream players in Malaysia are able to sell CPO at RM100/tonne-RM200/tonne lower than MDEX prices. This year, Malaysia and Indonesia are forecast to record a slower rate of palm oil production growth.  

- CIPROM would be an official platform where upstream and palm oil refiners can discuss and negotiate on an agreeable CPO price. 

- However, we believe that unofficially palm oil refiners and their suppliers can also negotiate pricing on their own based on their existing business relationship. The plantation industry is not hostile and Malaysian upstream players have been supplying CPO to the same refiners for the longest time. Most plantation companies supply CPO to Wilmar International, IOI Corporation or Mewah International.     

Source: AmeSecurities