Recent investments in Sabah’s palm oil sector, reinforcing both its processing and logistics capacity, could be the catalyst for further growth and capital input through the expansion of its downstream industrial capabilities.
Sabah is already the single largest contributor to Malaysia’s palm oil industry, with 1.48m ha under plantation and 5.78m tonnes of crude oil produced last year, representing 30% of the national total.
While plans to expand plantations and improve crop yields through developing more productive tree strains may moderately increase output, a more significant boost to Sabah’s palm oil industry and revenue would be engendered by a greater focus on downstream activity rather than upstream.
In mid-July, Genting Plantations, a subsidiary of Genting Integrated Biorefinery (GIB), announced it was partnering with US firm Elevance Renewable Sciences to build and operate a biorefinery at the Palm Oil Industry Cluster (POIC), a multi-purpose hub that is increasingly becoming the focus of the state’s oil sector. The 240,000-tonne-capacity refinery will produce a range of oil-based products, including olefins and chemicals that can be used in engineered polymers, as well as lubricants, surfactants and detergents.
The project, in which GIB holds a 75% stake, will use technology developed by Elevance to facilitate the energy-efficient processing of raw materials. Its metathesis catalysis production technique will break down natural oils and reconstitute fragments to manufacture different chemical combinations.
The biorefinery is just the latest downstream project to be launched at POIC Lahad Datu, which has secured combined investments in excess of $690m from more than 40 firms as of the end of the first quarter.
The need for Sabah to bolster its logistics infrastructure, along with its downstream capacity, has become more of a priority, according to Pang Teck Wai, CEO of POIC Sabah. With the launch of the ASEAN Economic Community (AEC) fast approaching, Sabah’s profile is set to rise. “Sabah has a lot to gain from the 2015 ASEAN integration as a staging hub for product distribution in what will be one of the top 10 economies in the world,” Pang told OBG.
With the POIC’s expanding range of facilities set to take on a greater significance in the years to come, the AEC will not be the only driving force for Sabah’s development. “The trade route from China to Perth and the rest of Australia is underdeveloped and our location and deepwater port capacity combine to give us a competitive advantage,” said Pang.
An announcement in early July that a large-scale palm oil bulking facility is to be developed at the Sawit POIC in Sandakan will further develop Sabah’s potential. The scheme is a joint venture between Rikaworth and Usaha Dimega – subsidiaries of Sawit Kinabalu and Kretam Holdings, respectively. The project includes the construction of a pier to facilitate the transport of raw materials, pumping facilities and storage tanks for liquid palm products with a combined capacity of 21,800 tonnes. It is expected that the $12.7m development will be operational by 2018.
Officials believe that expanding Sawit POIC, which is located in a region where up to 40% of Sabah’s palm oil is produced, will attract more downstream industries, boosting employment and the value-added component of Sandakan’s oil industry.
By centralising more of the production and processing locally, there could also be a significant reduction in transportation logistics costs, given that local products can be stored and exported directly from Sawit, rather than having to be shipped to other centres.
Further cost savings and downstream business can be found in the increased use of biomass material for energy generation, providing a cheap alternative to oil or gas for fire-powered plants and palm oil processing equipment.
The expanding investment in a broader range of downstream activities will also help insulate Sabah’s economy from price fluctuations on the international palm oil markets, and provide guaranteed markets for growers. The success of partnerships between local and foreign firms, along with the stronger infrastructure backbone being put in place, will likely see a stepping up of overseas investments in Sabah’s downstream palm oil industries, a development that should yield positive returns for the local economy.
Follow Oxford Business Group on Facebook, Google+ and Twitter for all the latest Economic News Updates. Or register to receive updates via email.