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Malaysian palm oil firm Sime Darby Plantation looks downstream for growth
[KUALA LUMPUR] Malaysian oil palm grower Sime Darby Plantation plans to boost its refining capacity and produce more higher-margin products in a bid to cut its exposure to volatile palm oil prices, an executive told Reuters.
Plantation company profits were hammered last year by a 15 percent fall in benchmark palm oil prices to a three-year low. Prices are expected to recover this year, but only by 3 percent, according to a Reuters poll.
"You see high levels of volatility impacting your bottom line because of market prices. Downstream, on the other hand, is a bit more consistent," said Mohd Haris Mohd Arshad, chief operating officer downstream of Sime Darby Plantation, the world's largest oil palm plantation operator by area.
"It's not only us, even the government is saying the focus for plantation companies is on downstream. You want to have that consistency in your income," Mohd Haris told Reuters in an interview.
About 80 percent of Sime Darby Plantation's net profit currently comes from its upstream business -- the crude palm oil produced from about 600,000 hectares (2,316 square miles)of plantations spread across five countries.
Sime conducts basic refining on 70 percent of the roughly 2.5 million tonnes of crude palm oil it produces annually - about 4 percent of global output - and sells the remainder to other refiners.
Mohd Haris said Sime Darby plans to increase its refining capacity of 3.8 million tonnes a year by expanding existing plants and via new refineries in key markets India and China. The company already sources fruit bunches and crude oil from other plantation firms to feed its refining businesses.
The expansion plans include doubling capacity at its 330,000 tonnes Malaysian edible oils and fats refinery, and at its 60,000 tonnes domestic biodiesel refinery, he said.
SEEKS HIGHER MARGINS
Sime Darby is also looking into producing more specialized products with higher margins, Mohd Haris said.
Crude palm oil is typically refined to extract olein, a liquid used in cooking, and stearin, a solid fat used to make soap.
Apart from such bulk refined products, the company will focus on four specialty areas: frying oil, bakery and confectionary, human nutrition, and animal nutrition and feed, which require additional refining and processing.
"Where we have better control over the margin is on the specialty side. So our capacity growth will probably be skewed more towards the specialty side of the business rather than bulk," said Mohd Haris.
While Sime already has a range of those products, it will increase those offerings in key markets like Europe, North America and the Middle East.
It will provide different types of frying or baking products based on customer preference, and increase research to widen its range of human and animal nutrition products.
"More investments will be made into the segments we want to go into," said Mohd Haris.