A repeat episode of the diesel shortage in Malaysia this year can badly jeopardise the entire supply chain for palm oil, one of the country’s top revenue earners, warned industry players.
Sidhu Brothers Group, the country’s leading palm oil tanker haulage company, is hopeful that the Government could come up with a “fixed” long-term solution to counter the diesel shortage, which has been rampant particularly in the past seven years.
Its commercial director Jimmy Sidhu told StarBiz that: “This can be via narrowing down the price differences between the government subsidised diesel and non-subsidised diesel for industry users.
“Another option is for a total removal of fuel subsidy eventhough it can be a rather painful decision to make.”
This year, the Government is expected to fork out RM19.46bil to subsidise diesel versus RM19.5bil last year.
In Malaysia, there are two parallel diesel markets – legally subsidised diesel and illegal siphoning/smuggling of subsidised diesel with their own market clientele.
“This is a lucrative market as the difference between non-subisidised diesel at RM2.67 per litre and subsidised diesel at RM1.80 per litre is 87 sen per litre,” said Jimmy who is a palm oil logistics expert.
He said: “The current cheaper local subsidised diesel makes it a constant target of rampant smuggling or syphoning into neighbouring countries where diesel prices are mostly sold higher than Malaysia.”
He pointed out that the consequences of continued delay in transporting fresh fruit bunches (FFB) to palm oil mills could lead to decomposition, thus affecting the palm oil extraction rate (OER) content.
The OER is an important performance indicator for crude palm oil (CPO) production.
“The higher the OER means better CPO production,” said Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad.
Once the quality of FFB deterioriates due to late delivery to the mills, the OER percentage would drop.
“Just 1% drop of OER per month in the country can translate into a loss of almost 77,000 tonnes of CPO per month valued at about RM212mil per month based on an average CPO price of RM2,764 per tonne in 2012.
“This is a big loss per month for Malaysia if the diesel shortage is prolonged for one month,” explained Jaafar.
Last year, the monthly average OER for Malaysia is 20.35% while the monthly FFB processed by mills in Malaysia is about 7.69 million tonnes.
For palm oil refiners, Jaaffar noted that the issue was on the delivery of CPO to refineries and from refineries to the bulking installation and/or port for export shipment.
There would be shutdown of refineries because of unavailability of CPO deliveries, build-up of stocks if processed palm oil cannot be shipped out in time, demurrage charges at the port because palm oil cannot be loaded on the ships, product quality drop and lost of business because of non-delivery performance which does not bode well for the local palm oil industry.
“This will affect Malaysia’s reputation as a reliable supplier of palm oil globally often touted by the Malaysian Palm Oil Board and Malaysian Palm Oil Council,” he added.
It is estimated that there are 2,000 palm oil tankers in Peninsular Malaysia alone.
Each tanker can carry an average 30 tonnes of CPO and processed palm oil (PPO).
“In a single day, there will be a movement of about 60,000 tonnes of CPO and PPO from mills to refineries and from refineries to the ports.
“Also, bear in mind that this does not include the FFB trucks which must supply the FFB to the mills every day,” explained Jaaffar.
Meanwhile, Jimmy pointed out that Sidhu Brothers Group has a timely delivery agreements, which cannot exceed 24 hours once the FFBs are harvested at the oil palm plantations.
“We are penalised based on the time recorded from the point it is harvested to mill. But because the national diesel shortage is beyond the operators’ control, the penalties are usually waived,” he added.
However, this would not resolve the problem. In fact it becomes worse for the palm fruit harvesters to generate income.
“The harvesters will quickly move on to other jobs as they are usually 100% based on commission because harvesting and transporting are outsourced to another party. Further delays will result in overripe fruits due to delays in harvesting and transporting,” explained Jimmy.