Carotech sees higher biodiesel output

By YVONNE TAN

CAROTECH Bhd is expecting biodiesel production to pick up amid rising production capacity and softer crude palm oil (CPO) prices.

The company's operations has received a much-needed boost, given that CPO prices have tapered off since hitting a record RM4,486 a tonne in early March.

“At Carotech, we have always been producing biodiesel as it is a by-product from our process of extracting phytonutrients.

“Therefore, we expect our production to pick up further following rising capacity and lower CPO prices,” managing director David Ho told StarBiz in an interview.

Carotech has only one core business – the extraction of phytonutrients – vitamin E and carotene from CPO, with methyl ester (or biodiesel) and glycerine as co-products.

CPO, which is the main raw material, makes up about 70% of the company’s total production cost.

David Ho

Lower CPO prices are good for Carotech as it will reduce its working capital requirements and make its products more competitive.

“However, as a conventional biodiesel plant, we depend much on the correlation of CPO prices with the prices of fossil diesel,” Ho said.

Considering that biodiesel is one of the company's largest markets, an ideal CPO price for the company would be below the price of fossil diesel, by at least US$200 per tonne.

This would allow palm biodiesel to be cheaper than fossil diesel and thus encourage users to switch from fossil diesel to biodiesel.

“At current crude petroleum prices of about US$126 per barrel, the ideal CPO price would be around RM2,800 per tonne to make palm biodiesel competitive,” Ho said.

He said Carotech had just commissioned another 50,000 tonnes of CPO processing capacity earlier this month, which brought the company’s annual capacity to 90,000 tonnes.

“We will be commissioning another 30,000 tonnes by the end of this year, bringing the annual capacity to 120,000 tonnes,” he added.

Ho said there was no significant capital expenditure for Carotech this year as the company was at the tail end of commissioning its new Lumut plant.

Carotech currently has two plants located in Lumut and Ipoh.

Ho said the company had been locking in CPO feedstock as and when the price of the commodity softened.

“But you never know what is going to be the lowest price, so how much can you lock in?” he asked.

Ho said Carotech was sourcing for other forms of raw materials, given the volatility of CPO prices.

He said studies were being conducted but nothing had been firmed up.

Last week, CPO prices eased to a seven-month low of RM3,027 a tonne.

While some biodiesel plants were incurring losses due to the volatility of CPO prices, Ho said Carotech was still operating profitably and that business was still feasible.

Meanwhile, the company is also upping its efforts on the sales of its phytonutrients products. “We are already in most major markets in the world,” Ho said.

The current average price of its 100% concentrate vitamin E and carotene is about US$1,200 and US$750 per kg respectively.

Carotech generates a combined production of 700gm of Vitamin E and carotene from each 1,000kg of CPO the company processes.

“At current capacity of 90,000 tonnes of CPO processed, we can produce about 31,500kg of Vitamin E and carotene per annum, subject to the quality of the CPO purchased,” Ho said.

As for the company’s earnings outlook for the financial year ending June 2009 (FY 2009), he said it all depended very much on the prices of CPO.

“Nevertheless, our financial performance for FY 2009 should be better than last year, as the increased capacity from our Lumut plant should raise our earnings,” he said.

OSK Research analyst Alvin Tai believes that CPO price will experience some volatility with some downward bias in the immediate term.

“For a biodiesel player like Carotech, it is not as straightforward as that.

“Lower CPO price will mean lower feedstock cost but crude oil price is also falling, so they may also have to lower selling prices (for biodiesel),” he said.

“My guess is that if CPO breaks the RM3000 per tonne mark, we'll see a quick drop to RM2850 per tonne.”

Another analyst said softening CPO prices were giving Carotech “some breathing space” for the time being, although they were still relatively high.

He also pointed out that the firm's phytonutrients – vitamin E and carotene products – were more resilient to the rising economic challenges compared with their co-product of biodiesel.

Carotech's shares have lost more than 70% since its all-time high of RM1.47 (after bonus issue) on May 3, 2006. It closed at 33 sen last Friday.