MOHD NOOR ADAM BIN MOHD NORDIN

M18211013

Term Paper:

Analysing Kemaman Bitumen Company (KBC)

In Malaysia Bitumen Industry

Business Economics

27/05/2018
 TABLE OF CONTENTS

1. INTRODUCTION

1.1. Kemaman Bitumen Company Sdn Bhd (KBC) 2

1.2. Malaysia Bitumen Industry 3

2. MARKET ANALYSIS

2.1. Competition In The Industry 4

2.2. Potential Of New Entrants Into The Industry 7

2.3. Power Of Suppliers 10

2.4. Power Of Customers 14

2.5. Threat Of Substitute Products 16

3. MARKET FORCES

3.1. Factors Affecting Demand And Supply 17

3.2. Pricing Strategy 19

4. DEMAND ANALYSIS

4.1. Elasticity Of Demand 21

5. CONCLUSION

5.1. Recommendations 23

5.2. Conclusion 24

6. REFERENCES 25

1
1. INTRODUCTION

1.1. Kemaman Bitumen Company Sdn Bhd (KBC)

Incorporated in Malaysia on 21st April 2003, Kemaman Bitumen Company Sdn Bhd
(KBC) is a wholly owned subsidiary of the Tipco Asphalt Group of Companies. KBC’s
one-of-its-kind refinery in the entire south-east Asia is designed to process heavy
Naphthenic Crude Oils.

Located at Telok Kalong Industrial Estate, Kemaman, Terengganu, on the east coast
of peninsular Malaysia, this Bitumen focused refinery is licensed to process 50,000
bbl. of crude oil per day and produces high quality Naphthenic Bitumen, Atmospheric
Gas Oil (AGO), Vacuum Gas Oil (VGO) and Naphtha.

With production capacity of more than 2,000,000 tons of Bitumen per annum, KBC
has become a key Bitumen player in the region and has contributed significantly
towards reducing the shortfall in Bitumen availability, especially in Malaysia.

2
1.2. Malaysia Bitumen Industry

Bitumen production in Malaysia begins as early as 1910, when oil was first drilled in
Miri, Sarawak. The first oil well (known as The Grand Old Lady) was discovered by
Shell. Thereafter, the same company constructed Malaysia’s first refinery in 1914,
which undertakes the whole manufacturing of petroleum products. When the national
company, Petronas came on to the scene in 1974, exploration licences for foreign
companies ceased to have effect with the passing of the Petroleum Development Act
(PDA) in Parliament in 1974, which granted Petronas ownership and control of the
nation’s petroleum resources.

In 1970, the first comprehensive five-year road development programme was

formulated by the Highway Planning Unit, which included expanding rural roads and
plans to construct three new highways linking the east and west coasts. When all
sections of the North–South Expressway were completed and officially opened on 8
September 1994, there is a growing needs for good quality Bitumen supply to
accommodate new huge demand of it. The Petronas Melaka Refinery Complex
located in the state of Melaka in Malaysia was constructed as a solution. Completed
in 1994, this refinery becomes the only refinery producing Bitumen for road
construction in Malaysia. However, most of Bitumen supply in Malaysia is still
imported from outside of Malaysia, mainly from Singapore and Middle-East by Shell
and other local dealers with PDA license.

In 2003, sensing an opportunity for good investment and to minimize dependency on

import of Bitumen, Tipco Asphalt Public Company Limited, a leading road
construction and Bitumen supplier in Thailand, and the Malaysian Government, come
to an agreement for construction of another refinery focusing on Bitumen production.
KBC’s plant in Kemaman was set up in 2007 on the invitation of the Malaysian
Government through the East Coast Economic Region (“ECER”) investment
initiative. At the time, the sole producer of Bitumen, Petronas Dagangan Berhad
(PDB) lacked the capacity to produce sufficient quantities of the subject merchandise
to meet the local demand in Malaysia. Naturally, due to this, a substantial quantity of
Bitumen had to be imported from outside of Malaysia – in turn causing the
unnecessary outflow of Malaysia ringgit.

3
2. MARKET ANALYSIS

2.1. Competition In The Industry

Ever since KBC refinery started its full operation in 2007 until today, Petronas Melaka
Refinery Complex is the only other Bitumen producing refinery in Malaysia. However,
there are also several other licensed Bitumen depot operator importing supply of
Bitumen from other countries as per detailed in the graphic below:
Refinery Bitumen Depot
Innate Sinergy
Petronas Dagangan Berhad (PDB)
Shell
Blackhem
Kemaman Bitumen Company (KBC)
Puma Energy

*PDB only have Bitumen depot in Sabah and Sarawak

Graphic 1: Bitumen producing refinery and Bitumen depot in Malaysia

4
Based on the graphic provided, all of the Bitumen suppliers are fairly located to cater
demand of Bitumen according to the region of their location. KBC for East Coast
region, Innate Sinergy for Northern region, Blackhem and Shell for Central region,
and lastly; Puma Energy and PDB for Southern region. However, Petronas has the
advantage of strategically located in Malacca, in between two (2) of the most
demanding region of Central and Southern. In an essence, there is some sort of
monopolistic supply for Bitumen supplier in their respective region.

Next, Bitumen sources in Malaysia can be segregated into three (3) categories:-

I. Bitumen from crude oil refinery

Only KBC and PDB have their own refinery to produce Bitumen supply.
Almost half of Bitumen supply in Malaysia come from these two (2)
sources. The reason for this is due to the strict PDA license
requirement to set up refinery in Malaysia and to protect Petronas as
the company with national interest. KBC managed to set their refinery
because it is focusing mostly on Bitumen, a petroleum product
considered as by-product by Petronas and with limitation of at
maximum, only 25% of total Bitumen production is allowed to be sold in
Malaysia.

II. Bitumen depot operator

To supplement shortage of Bitumen supply in Malaysia, the
Government licensed several Bitumen depot operators namely; Innate
Sinergy, Shell, Blackhem, and Puma Energy. These depot operator are
allowed to import their product supply mainly from Singapore and Iran,
or to take supply from refinery operator and store it in their Bitumen
storage tank.

III. Direct import of Bitumen

Even though KBC and PDB total Bitumen annual production can
actually cater for the total demand of Bitumen domestically, Malaysia
still import Bitumen from others; mostly from Singapore (through
ExxonMobil and Singapore Refining Corporation) due to its close

5
 proximity. Details of sources of Bitumen import are as per detailed in
the chart below.

Chart 1: Source of Bitumen Import as per Statistics Department Report

Based on the small amount of competitors in Malaysia Bitumen market, it is

oligopolistic in nature. KBC main threat comes from Petronas as the largest single
Bitumen supplier and the Bitumen depot operator importing supply from Singapore.
In 2017, KBC market share accounts for only 16% at 124,860 MT from total market
share of 780,262 MT. This can be explained further using the chart shown below.

Chart 2: Bitumen Market Share 2017

The combination of all four (4) Bitumen depot operator accounts for 55% (431,638
MT) of total Bitumen supply. Most of their Bitumen supply source is coming from
Singapore due to the fact that there is no tax and duty imposed for import of Bitumen

6
in accordance to the World Trade Organisation (WTO) agreement, in which Malaysia
and Singapore are members.

2015 - 2017 Singapore Domestic vs Singapore-Malaysia Ex-

Ref
500
400
300
200
100
0
-15 r-15 -15 l-15 -15 -15 -16 r-16 -16 l-16 -16 -16 -17 r-17 -17 l-17 -17 -17
n a y u p v n a y u p v n a y u p v
Ja M Ma J Se No Ja M Ma J Se No Ja M Ma J Se No

Singapore-Malaysia Ex Refinery
Singapore Domestic

Chart 3: 2015 - 2017 Prices Comparison (Argus Asphalt Report)

Based on the Argus Asphalt Report from the chart above, for the period of 2015-
2017, KBC market share had steadily declined due to the price dumping activity by
Singapore Bitumen supplier into Malaysia market. Hence, other than PDB refinery
and domestic Bitumen depot operator, Singapore is also a huge competition to KBC,
especially at the Southern region. When you factor in transportation cost and the
huge difference of price between KBC and Singapore direct supply, KBC almost had
no chance of getting to supply to the region, unless there is a very severe shortage
7
 from other suppliers in the region. Usually, KBC will supply to the Southern region
using dealers instead of direct supply because dealers have cheaper transportation
cost, better credit terms offer and registration as their customer require no guarantee,
which will attract customer better than KBC can offer.

2.2. Potential Of New Entrants Into The Industry

After the inception of Petronas as the national oil company, every oil & gas products
seller, dealer and operator are required to apply for PDA license under Petroleum
Development Act 1974. This is to ensure Petronas business interest is well
protected.
This is why, there are only two (2) refineries producing bitumen and only four (4)
Bitumen depot are licensed to operate in Malaysia.

According to Section 6 (3) of the Petroleum Development Act 1974 and Regulation
3A (2) of the Petroleum Development Regulations 1974, “Application for permission
to initiate or continue any business marketing or distribution of petroleum or
petroleum products under section 6 (3) of the Petroleum Development Act 1974
shall be made to the Secretary General of the Ministry of Domestic Trade, Co-
operatives and Consumerism (KPDNKK) “.

KPDNKK regulates marketing and distribution activities of petroleum materials or

petroleum products through four (4) types of PDA Authorization issued based on the
following activities:

I. To operate gas stations / skid tank / portable container system /taking

over gas stations / (PDA 1)
II. To carry out bunkering services (PDA 2)
III. To operate petroleum transportation services (PDA 3)
IV. To carry out wholesale marketing of petroleum / LPG based materials
(PDA 4)

Petroleum or petroleum products for the purpose of Regulation 3A (2) shall be

subject to the list specified below:

8
 I. Petroleum
II. Liquified Petroleum Gas (LPG)
III. Natural Gas
IV. Regular & Premium Motor Gasoline
V. Methanol
VI. Propylene
VII. Xylene
VIII. Methane
IX. Toluene
X. Butane
XI. Fuel Oil
XII. Kerosene, Aviation Turpine Fuel, Dual Purpose Kerosene and Jet Fuel
XIII. Bitumen and Asphalt
XIV. Lubricating Oil
XV. Naphtha Based Solvents
XVI. Benzene
XVII. Ethylene
XVIII. Acetylene
XIX. Ammonia
XX. Urea form Ammonia
XXI. NPK Fertilizer
XXII. Ammonia Nitrate
XXIII. Ammonia Sulphate
XXIV. Propane
XXV. Automotive Industrial & Marine Diesel Oil

For further protection on Petronas and other local companies; KBC, Puma Energy
(originated from Argentina) and Shell (from Holland), as foreign companies, were
given PDA license with additional condition that not more than 25% of the total
annual sales volume is dedicated for domestic market. The balance 75% must be
exported outside of Malaysia. Failure to follow this would result in cancellation of
PDA license to sell Bitumen and other petroleum products in Malaysia.

In 2014, several measures were taken by the Government of Malaysia to further

tighten the PDA licensing requirement such as;

9
 I. Shorten the validity period of the licence to one to two years from the
current practice of one to five years.
II. Individuals who were convicted under the PDA would be blacklisted
from applying for a new licence, even under a new company.
III. KPDNKK would cooperate with the Customs Department to prepare
tighter standard operating procedures concerning bunkering activities to
combat export of subsidised diesel and illegal sale to foreign vessels.
IV. KPDNKK would consider the possibility to reinstate the subsidised
diesel marking programme which had been adopted only between June
2006 and March 2011.
V. Control of Supplies Act 1961 was amended to suit the current market
situation, including to impose heavier penalties.
VI. Frozen of new licencing applications, unless there is critical demand
requiring new license award.

Due to the very strict requirement for PDA license approval and the Malaysian
Government protection on Petronas and local companies, it can be concluded that
Bitumen industry in Malaysia has a very strong barriers to entry. Thus, the threat of
potential new entrants for Bitumen industry is very low. Before KBC full
commencement in 2007, only PDB exist as Bitumen producing refinery and Shell as
Bitumen depot operator cum supplier.

Later, to support the ever increasing demand for Bitumen supply created by the
numerous road and expressway construction project initiated by the government,
Blackhem was awarded with their PDA license to operate at Port Klang in 2012,
followed by Innate Sinergy in 2015 for their depot in Penang and lastly Puma Energy
received their license to operate from Johore in 2016.

2.3. Power Of Suppliers

10
KBC is the only Bitumen focused refinery in the south-east Asia designed to process
heavy Naphthenic Crude Oils. Unlike Petronas, Shell and other major refinery that
require complex petroleum cracking, KBC uses straight run process as per detailed
in the graphic below:

Graphic 2: KBC Refinery straight – run process

KBC refinery straight – run process begins with crude oil discharged from the crude
tankers at the Liquid Chemical Berth (LCB) and pumped via ship pump into the
refinery crude tanks. The crude is stored in the crude tank at a temperature of 50°C
to ensure that the crude is able to flow. The crude is fed to the crude distiller via the
crude preheat train and the crude furnace.

Naphtha is produced from the top of the atmospheric fractionator together with a
very small amount of off gas and the naphtha is cooled and rundown to the naphtha
floating roof storage tank. Kerosene is drawn off from tray 18 to the kerosene side
stripper where the flash point is adjusted and rundown through rundown cooler to
kerosene storage tank. Atmospheric Gas Oil (AGO) is drawn off from tray 6 to the
AGO side stripper to remove light ends. AGO is pumped through product exchanger
and rundown cooler to AGO storage tank.

The residue from the atmospheric column is routed to the vacuum furnace and
vacuum column. The pressure in the vacuum column is maintained at 0.04bar by
steam ejector at the top of the column. Light vacuum gas oil (LVGO) is produced
from the top of the vacuum column and rundown to the storage tank. Heavy vacuum
11
gas oil (HVGO) is drawn from the middle of the vacuum column and pumped
through the heat exchanger to HVGO storage tank.

Bitumen is produced at the bottom of vacuum column and is pumped to bitumen

storage tank. All products are rundown to their storage tanks below their flash point
except for naphtha where it is stored in floating roof tanks and thus does not have
any vapour space above the liquid.

The products include naphtha, kerosene, AGO and VGO is loaded via ships at the
LCB. Bitumen is then loaded at the road loading gantry for customers in Peninsular
Malaysia and exported by marine via the LCB to the East Malaysia and regional
countries.

Most petroleum refinery, including Petronas and Shell, consider Bitumen as their by-
product due to the low sales value of it compared to other petroleum refined
products such as Kerosene (jet oil) and Naphtha (diesel and gasoline). The lower
the volume of Bitumen produced, the better. But as the saying goes; what is
garbage for some, is a pile of gold to others. KBC refinery is unique, as it focuses
solely on getting the highest possible Bitumen content from their petroleum refining.

To produce higher quantity of quality and valuable petroleum products, other refinery
require major complex cracking method. They would prefer light sweet crude, which
has very low Bituminous content, over heavy sour crude. KBC however, refine only
heavy sour crude, in order to get as much Bitumen content possible. Hence, KBC
source of crude oil supply is limited to only heavy sour crude that is rich in Bitumen
content. Types of crude oil and its Bitumen content differs depending on the location
of the crude oil sources, geographically speaking. For example, Malaysia open sea
crude oil is considered as very light sweet crude, the best quality in the market, due
its very low residue (Bitumen content) compared to say, Middle East crude, which is
much cheaper due its lower quality and higher Bitumen content.

12
 Chart 4: Residue (Bitumen) content of crude oil based to continent

Based on the chart 4 above, the only source of crude oil suitable for KBC
requirement of high Bitumen contain is from South America. There is a very huge
difference of long residue (Bitumen) content in South American crude oil compared
to even the next best source of supply from Middle East.

Also, KBC only processed Naphthenic Bitumen, compared to the standard Paraffinic
Bitumen produced by other refinery. KBC chooses this type of Bitumen due to its
chemical chain properties. Naphthenic Asphalt has Cyclohexane chemical chain,
which improve the rutting resistance of the road using it.

Graphic 3: Naphthenic and Paraffinic Bitumen Chemical Chain

13
 Graphic 4: Advantages and Benefits of Naphthenic Bitumen

In order to produce this high quality Naphthenic Bitumen, Venezuela is the only
country in the world producing the crude oil with the needed chemical properties.
KBC had conducted numerous test on crude oil supply all over the world but only
these three (3) oil wells listed below, all in Venezuela, provide the best quality
Naphthenic Bitumen.

Bachaquero-13 Boscan Laguna

Table 1: Characteristics of Bachaquero-13, Boscan and Laguna Oil Well

14
 Considering the very selective types of crude oil required plus the limited number of
sources, the power of suppliers are very high. As a matter of fact, KBC is currently
facing problem in securing supply of crude oil ever since the political turmoil started
in Venezuela. This over-dependency on Venezuela crude oil availability is not
healthy for KBC long term business. Moreover, the cost of switching to other
suppliers would be much higher later in the future if this is not addressed properly.

2.4. Power Of Customers

KBC customers can be divided into two (2) main categories:-

I. Direct Users
Usually premix plant supplier, where Bitumen is the most expensive
component in producing mix design for road construction. Occasionally,
there are also sales to Bitumen emulsion plant but the numbers are too
small, it is almost insignificant to the total sales. As of May 2018, based
on the list provided by the Public Work department, there are 140
registered premix plant in Peninsular Malaysia alone. KBC do not
supply directly to East Malaysia. Only if Petronas or Shell have
shortage of product will KBC supply to East Malaysia via marine. The
dynamic of Bitumen sales by KBC can be further explain using the
flowchart below.

15
 Graphic 5: Flowchart of Bitumen Sales Process

II. Dealers
Most of KBC sales goes to PDA license dealers such as Utusan
Mewah, Qastalani, Pertama Petroleum and many more. The numbers
are much smaller compared to direct user customer base but most
volume is coming from this segment of customers. Dealers usually
have the privilege to lock price to a certain lower value for a month
period and their credit limit are usually bigger than direct user.
However, KBC prefer dealers over direct users simply because they
have strong cash flow, meaning that they can pay well earlier before
due and they have wide coverage nationwide, making it easier for KBC
to supply to areas that might not be reachable if KBC were to sale

16
 directly to these customers. The chart below is the proof of dealer’s
superiority over direct user.

Chart 5: Market Share between Dealers and

Direct User in 2017

Although the numbers of customer base for direct users is huge at 140 for premix
plant alone, most of KBC sales goes to the small number of dealers. In 2017, 64% of
KBC Bitumen volume goes to dealers compared to only 34% to direct user. Hence,
the power of customers is quite high. This in return, forced KBC to sale at lower
marginal profit compared to sales to direct users. Moreover, dealers have the option
to get supply from PDB, Bitumen Depot operators or direct supply imported from
Singapore. In order to stay competitive and to avoid dealers from choosing rival
Bitumen supplier, KBC have to sacrifice profit margin in place of bigger volume. This
strategy sacrificed profit margin but provide KBC with strong cash flow.

2.5. Threat Of Substitute Products

Despite years of research and advancement of new technology, there is still no

better substitute to Bitumen in road pavement. One of the reason to this is due to
the fact that Bitumen pavement is quite environmentally friendly. When Bitumen
pavement is in needed to resurfaced or removed, the millings can be reused in new
pavements, reusing not just the aggregate but also the Bitumen binder. Old roads
can be literally mined to build new ones; and since the oil in Bitumen binder is never
burned, it does not generate greenhouse gases. Effectively, Bitumen roads are a

17
 form of carbon sequestration. In addition, Bitumen shingles and rubber tires can be
used in Bitumen pavements, keeping those materials out of landfills.

If there is any alternative to Bitumen pavement, it is road paving using Portland

cement concrete. However, the energy used to create Portland cement concrete
pavements is much greater than is used to create Bitumen pavements. Currently,
construction of a Bitumen roadway has a carbon footprint between a sixth and a
tenth smaller than a comparable concrete roadway, and that gap will widen as the
use of warm-mix technology and recycling increases.

In Malaysia, almost all road paving are using flexible Bitumen based road
pavement. Except for frequently damaged road and heavy duty expressway, PWD
and highway authority would always prefer Bitumen road pavement over rigid
concrete pavement. Hence, it is safe to say that the threat of substitute products are
very low to the point of no existence.
3. MARKET FORCES

3.1. Factors Affecting Demand And Supply

KBC refinery dedicated its production solely for road paving and construction. From
the selection of crude oil chemical properties and bitumen content, to the refining
process, it is obvious the demand and supply for KBC Bitumen rely 100 percent on
numbers of commencement of road projects and constructions.

KBC dependency on road projects alone resulted in its price of supply very sensitive
to any changes in demand. If there is many road projects involving paving, the
demand will significantly increase and this will directly increase the volume of KBC
Bitumen supply.

Also, the oligopolistic nature of Bitumen market industry in Malaysia also influenced
the nature of demand and supply for KBC Bitumen. If there is any shortage from
other supplier, there are not many options available for Bitumen buyer and KBC can
take advantage of this situation. In fact, in certain situation, other Bitumen supplier
will take KBC product to supplement the shortage of their product. For example, if

18
Petronas do not have the volume for Bitumen supply to Sarawak, they will buy KBC
Bitumen and store in their Bitumen depot over there.
3,000 2,804

2,500 2,404
2,097 2,022
2,000 1,862
Sales Volume (MT)

1,385 1,445 1,433

1,500
1,154
1,000 797
738 753

500

-
17 17 17 17 Y'17 17 L'17 17 17 T'17 17 17
A N' EB' A C' P R' A UN' JU UG' EP' C O V' EC'
J F A Bitumen J S O D
M M Sales Actual A N

Chart 6:
Monthly Bitumen Sales Volume for East Coast Region in 2017

To understand better the dynamic of demand and supply of KBC Bitumen, let’s refer
to KBC monthly Bitumen sales for East Coast region in 2017 shown in Chart 6 as
reference. From the outlook of it, it is obvious there is a significant difference
between total sales volumes for the first half of the year to the latter half of the year.

3,000
2,418
2,500 2,224
2,079 2,138
2,000

1,500 1,300 1,356 1,307

1,493 1,109
1,000 840
606 517
500

Bitumen Sales Actual

19
 Chart 7: Monthly Bitumen Sales Volume for Central Region in 2017

The same can be said for KBC Bitumen sales volume for Central Region in 2017.
Bitumen sales volume are much better in the last six (6) month, with the graph
movement almost the same to the one in East Coast region. Although for Central
region, the sales volume peaked in June, total volume for the last six (6) months far
exceed the total volume for the first six (6) months.

The trend in both different region chart movement is directly related to the sanction
of road paving and construction projects by Public Works Department (PWD). The
low sales volume in January is due to no new project sanctioned by PWD yet and
contractors had already finished their job for the previous year. Also, at the
beginning of the year, most projects are still in tender stage. Only maintenance work
and major road contract paving work (usually expressway) are being done during
this period.

Sales will continue to be slow usually until April or May, when during this period,
PWD will start to award work contract to successful bidders. Sales volume will be
larger until end of the year where contractors will be working hard to finish their
work according to the contract to be able to participate in again the following year.
Other factor that affect market demand and supply for Bitumen is shortage of supply
from competitor supplier. In 2017, Petronas conducted major compulsory
maintenance work for their refinery in December and had to close operation for
almost two (2) weeks. Due to this, despite project had started to slow down because
most projects had already finished and monsoon season had already started

20
 hampering roadwork paving progress, sales volume for both regions are quite high
in December.

Sometimes, weather conditions and natural disaster could also affect the supply
and demand of Bitumen in the market. Road paving work should not take place
during rainy day to avoid road quality being compromised. Water is the number one
enemy to paved road. This is why, contractors would strive to complete their work
before November to avoid monsoon season. At the East Coast, several areas would
be flooded annually and this will make it impossible for road paving work to take
place.

However, the impact of weather and natural disaster had much smaller impact to
the Bitumen supply and demand, compared to other factors stated earlier. The
reason being, for every road damaged by flood and rain, PWD will immediately
issue work order for repairing. This will create more demand, enough to supplement
the shortage caused by weather condition and natural disaster.

3.2. Pricing Strategy

In Malaysia Bitumen industry, price is always the first criteria for customer to make
decision on which Bitumen supplier to choose. Then only will they consider quality of
product, on time delivery and staff service level. This is due to the nature of road
construction in Malaysia emphasizing maximising of profit over quality. Moreover,
poorly constructed and paved road means more project later on for the contractors
and more premix from the premix plant.

Customer consider all Bitumen from any supplier are the same. There is only slight
difference of quality but in general, any Bitumen, as long as it is following the
specifications set by PWD, is homogenous product to them despite coming from
different sources. Hence, KBC superior product quality (refer Graphic 4) does not
mean anything to most of the customer, especially dealers.

To maximize profit with direct users, KBC use first-degree price discrimination for
East Coast region customers and third degree price discrimination to customers at
other places as pricing strategy. Due to the monopoly KBC enjoys, being the only
Bitumen supplier strategically located at the East Coast region, KBC take full
21
 advantage of it. Using first-degree price discrimination not only will enables KBC to
charge the maximum possible price to each customer, it will also enables the
company to captures all available consumer surplus and eliminate deadweight loss.

In order to achieve this, every single time when there is changes in price, KBC will
send new price quotation for ex-refinery and delivered price to customer. This will be
known as spot price and usually at a much higher price than cost. Account
Managers will then contact their customers and will take the time to bargain or
'haggle' with the customer about the price that customer is willing to pay - some
buyers willing to pay a higher price other buyers a lower price.

For customers at other regions, competition are stiff and KBC has the disadvantages
of high transportation cost, the only switching cost involved. To solve this problem,
KBC will segregate its customers into two or more separate markets, each market
defined by unique demand characteristics. Price offered will be in accordance to the
value the customer willing to pay. However, should the customer request for further
discount until below the marginal revenue level set, KBC would stop the negotiation
process and move on to other customers.

KBC approach for dealers segment of the customers is different from other
customer. Since dealers usually take product in big volume at pay earlier than due
date, KBC will offer one (1) month lock-in price at the start of every month with a
very low price subject to the minimum volume they are willing to take. This is to
persuade dealer to take as many volume as they can and to avoid them from taking
products from other supplier. Even though the profit margin per metric tonne is much
lower compared to others, the huge volume loaded by them is important to ensure
tank-top would not happen whil KBC still enjoy good profit. Sometimes, KBC will
also use this block pricing strategy to loyal direct user customer.

4. DEMAND ANALYSIS

4.1. Elasticity Of Demand

22
Considering the sensivity of demand compared to the availabity of supply and vice
versa, it can be deduced that the the demand for KBC Bitumen is very elastic.
Factors presented earlier; numbers of roadwork awarded by PWD and availability of
product by other supplier; also affect the price of Bitumen and its price revenue.
3,000 200
2,804
175
180
2,500 2,404
160
2,097
2,022 140
2,000 1,862
113 114
120
104 101
1,500 1,385 1,445 1,433 100
82
75
1,154 71 71
65 80
61
1,000
738 797 753 49 60

40
500
20

- -
17 17 17 17 17 17 L'1
7
'1
7 17 T'1
7 17 17
N' B' AC
' R' Y' N' U G P' C V' EC'
JA FE A P
M Bitumen
A JU
M Actual
Sales
J A U SE
Average O
Margin/mtNO D

23
 3000 186 200
180
2,418
2500 2,224
2,079 2,138 160
140
2000
104 103 120
92 1,356
1500 85 85
1,300 1,307 100
1,493 66 1,109 73 71
63 80
1000 840 51 60
606 517 35
40
500
20
0 0

#REF! Bitumen Sales Actual Average Margin/mt

Chart 8: Monthly Bitumen Sales Volume and Revenue for East Coast Region in 2017

Chart 9: Monthly Bitumen Sales Volume and Revenue for Central Region in 2017
Using both charts presented above, in comparing revenue against volume, there is a
huge fluctuation of price revenue on monthly basis. In both regions, revenue will
start at a high point before gradually dropping and becoming more stable towards
the end of the year (except for revenue in September for Central region that will be
explain later); achieving the equilibrium price where KBC can sell as much volume at
a price the customers are satisfied to take, as much as they required.

KBC strategy has always been to sell at lower revenue margin when demand is high
and to sell at higher revenue margin when demand is slow. This is contradicting to
the normal goods law of demand and supply, whereas; when demand is high,
revenue margin will also increase when supply of product is low. Hence, KBC
consider their Bitumen product as inferior goods.

The price revenue strategy practised by KBC is due to the high cost of refining crude
oil to Bitumen. When the demand is slow in the earlier half of the year, KBC will sell
at higher price, with the knowledge that most East Coast region customers and
dealers would still have to take KBC product, to maximise revenue at whatever
volume KBC could sell. But when demand is high, KBC could sell at lower revenue
margin due to volume of Bitumen sold is enough to cover the refining cost and make
profit.

24
 Also, KBC need to get their product out as many as they can to avoid tank top. Tank
top is a term used in the Bitumen industry when the Bitumen in a storage tank
reached its maximum capacity and the whole refinery had to stop operation until
product can be moved out of the tank. Hence, when the volume of Bitumen going
out is slow in the first half of the year, KBC will strive to sell as much volume as it
can on the second half of the year when demand for Bitumen is abundance. It is
imperative for KBC to offer price revenue at equilibrium point during the period when
demand peaked as other supplier scrambled to offer the best price they could offer
to the customers.

For the major spike of price revenue in September 2017 in the Central region graph,
this is due to one of the major supplier in Central region had off-spec product. Off-
spec product is when the Bitumen produced fail to meet the minimum requirement
stipulated in Malaysia Standard (MS) set by SIRIM and PWD. Once there is limited
product in the market when demand is high, KBC will pounce immediately to take
advantage and sell it at higher price.

5. CONCLUSION

5.1. Recommendations

Based on the facts and figures presented in this paper, KBC is a major player in the
Bitumen industry in Malaysia. However, there are still a lot of room for improvement,
especially when KBC market share in Bitumen market share continously dropped for
the past three (3) years.

The biggest factor for this shrinking market share is the price dumping activity from
Singapore supplier. Ministry of International Trade (MITI) have a specific committee
dealing with Trade Remedy Measure to combat price dumping activity. KBC should
engage MITI and lodge official petition for the Malaysian Government to impose
import duty for Bitumen coming from Singapore. This will result in fairer competition
between Bitumen suppliers in Malaysia, especially to KBC and Petronas as the only
two (2) refineries.

25
Next, KBC should consider diversifying its crude oil sources, not limiting to only crude
oil supply in Venezuela. Given the political instability currently happening over there,
this could affect KBC crude oil supply and disrupt the whole operation of KBC. Whilst
it is important to maintain product quality, KBC should conduct extensive R&D to find
alternative supply or to produce Paraffinic Bitumen that is comparable in terms of
quality to Naphthenic Bitumen.

KBC should also diversify its product. Rather than depends solely on raw Bitumen,
KBC should tap onto its parent company, Tipco bituminous product such as Polymer
Modified Bitumen (PMB), Bitumen emulsion, and many more. By having more
product to sell, KBC could mitigate the risk of loss of revenue when there is slow
demand, tank top problem and refinery shutdown due to maintenance.

Lastly, it is recommended that KBC work closely with the authorities and universities
to conduct research and development of product that could take advantage of the
unique properties of KBC Naphthenic Bitumen. Being the only Naphthenic Bitumen
Producer, KBC should take advantage of its unique chemical properties.

26
5.2. Conclusion

The evidence presented in this paper shows that as one of the major player in an
oligopolistic Malaysian Bitumen market, KBC is in good position for years to come.
With low competition in the same segment (ony PDB the other refinery), strong
barrier for entry and with little to no substitutes to its product in the market, it is
almost impossible for KBC to fail in Malaysia, especially with so many expressway
work currently in progress.

However, KBC needs to always be vigilant in ensuring the high power of customers
and suppliers being managed well, to avoid loss of income in a very high cost
business model. The additions of Bitumen depot operator and price dumping activity
by Singapore refinery are also issues that require elegant probem solving from the
KBC top management.

The elasticity of demand means KBC can experiment with their price strategy, taking
adavantage of first-degree price discrimination as a profit maximising. This is despite
KBC reliance fully on roadwork construction. Provided roadworks project continue to
increase, KBC is in good condition and can only grow bigger.

27
6. REFERENCES

A. Ruby, Douglas. 2003. Price Discrimination.

http://www.digitaleconomist.org/pd_4010.html. Accessed May 25, 2018.

AGC Malaysia. 2016. Act 144 Petroleum Development Act 1974.

http://www.agc.gov.my/agcportal/uploads/files/Publications/LOM/EN/Act
%20144%20-%20Petroleum%20Development%20Act%201974.pdf. Accessed May
25, 2018.

Petronas Melaka Refinery. 2018.

http://www.petronas.com.my/our-business/downstream/oil/oil-refining/Pages/melak-
a-refinery.aspx. Accessed May 25, 2018.

Nada Magazine. 2/2009. PP 2986/01/2010(023290).

http://www.petronas.com.my/media-
relations/publications/Documents/Nada_2009_2-.pdf. Accessed May 25, 2018.

Hays, Jeffrey. 2013. ENERGY, OIL AND NATURAL GAS IN MALAYSIA.

http://factsanddetails.com/southeast-asia/Malaysia/sub5_4e/entry-3687.html.
Accessed May 25, 2018.

KBC Product Brochure. 2018

Kemaman Bitumen Company Sdn Bhd. 2015. About Us. 2018.

http://www.kbc.com.my/about-us/. Accessed May 25, 2018.

Langganan Data Trade Jabatan Perangkaan Malaysia. 2017

Ministry of Domestic Trade, Co-operatives and Consumerism. 2018. Permission

Under The Petroleum Development Act (PDA) 1974
https://www.kpdnkk.gov.my/kpdnkk/licensing-management-2/?lang=en. Accessed
May 25, 2018.

28
Sun Media Corporation Sdn. Bhd. 2014. PDA license requirements tightened.
http://www.thesundaily.my/news/1095882. Accessed May 25, 2018.

Wikipedia®. Malaysian Expressway System. 2018.

https://en.wikipedia.org/wiki/Malaysian_Expressway_System. Accessed May 25,
2018

Zakaria, Zulaika. 2017. KBC Sales Report 2015-2017

29