Insight: Top palm oil producer Indonesia wants to be more refined

Sun Jul 15, 2012 5:45pm EDT
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By Michael Taylor and Niluksi Koswanage and Chew Yee Kiat

JAKARTA/KUALA LUMPUR (Reuters) - 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 $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 (47.39 million tons) of palm oil, or 80 percent 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 neighboring 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.   Continued...

Security officers stand guard in front of palm oil storage tanks at the palm oil-based refinery plant owned by Sinar Mas Agro Resources and Technology (SMART) in Marunda, West Java March 30, 2011. REUTERS/Enny Nuraheni