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PCGG shuts down firm funded by coconut levy

/ 01:16 AM June 11, 2013

One of the sequestered coco levy-funded companies has been shut down due to financial hemorrhage caused by mismanagement by Arroyo-appointed caretakers, the Presidential Commission on Good Government (PCGG) said on Monday.

United Coconut Chemicals Inc. (Cocochem) was shut down last year, after nearly 30 years of operation, due to mismanagement starting in 2005 that led to “unprecedented losses” compounded by the loss of its domestic, US and European markets for oleochemicals.

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Cocochem officials appointed under the Aquino administration discovered that previous Cocochem directors had contracted questionable services that bled the company while letting plant equipment deteriorate.

By the end of 2011, company losses totaled $55.3 million resulting in a net equity of $16.6 million, said Evelina Patiño, the current Cocochem executive vice president and chief operating officer, who was appointed in January 2011.

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“With the expected losses in 2012 of $7.3 million, the company will be void of any cash reserves to enable it to continue to operate,” she said.

On top of the zero cash reserves, Cocochem still owes $65 million to CIIF Oil Mills.

Cocochem is one of the 50 surrendered and sequestered companies under the PCGG’s government-nominated directors.

These presidential appointees were supposed to preserve the sequestered companies’ assets as the cases over their ownership remained pending in the courts the past two decades.

Cocochem was established in 1981 to boost the local coconut industry by buying coconut oil and producing oleochemicals such as fatty alcohol.

The projected captured domestic market among soap and detergent manufacturers did not materialize while bulk exports to Europe and the United States were constrained by the cessation of bulk chemical shipments to carry oleochemicals.

Patiño recently submitted a report to the PCGG detailing the events that led to the current board of directors’ decision on June 18, 2012, to shut down plant operations “indefinitely.”

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On top of the market volatility, the PCGG learned of mismanagement issues since 2005, under former Cocochem presidents Helen Osias and Dr. Carlito Puno.

“The key to Cocochem’s profitability from 1986 to 2005 was the high operating rate of the plant,” Patiño said.

“However in 2006, the management led by Osias recommended that Cocochem terminate the supply agreement with Peter Cremer,” she said, saying the termination of the contract led to a 30 percent loss in production volume.

The sales volume dropped even though the same amount of bunker fuel was used, leading to a net loss that ballooned to P303 million in 2007.

The PCGG also learned that under Osias’ watch, Cocohem paid P30 million to the law firm Carag de Mesa and Zaballero purportedly to review transactions, such as the transfer of some plant properties.

The amount was questioned by minority shareholders headed by Eusebio Tanco who made a vote of no confidence against Osias.

Unsold inventories

Puno, former chairman of the Commission on Higher Education, replaced Osias in July 2007.

Five months later, he closed down storage tanks in Rotterdam and Hudson, New York, and in December 2007 signed a marketing agreement with a startup company that had no track record in exports sales.

“The marketing agreement with Oxford Oleo Solutions resulted in huge, unprecedented losses for the company due to the failure of this new marketing agent to sell production volumes. Cocochem suffered massive losses due to the high level of unsold inventory whose value had to be written down,” Patiño said.

Oxford Oleo Solutions brokered a sale between Cocochem and MagnaKron but Oxford was not able to sell the by-products such that “by mid-2008, the inventory of finished goods had built up.”

MagnaKron was also not able to pay, leaving Cocochem with unsold inventories.

“In the end, Cocochem had to shut down the plant due to high inventories. It was also necessary for the company to write down the value of the inventory due to the large drop in the prices of the products. Although sales volumes were not being achieved and finished product inventory was rising, Dr. Puno continued to purchase coconut oil defying the specific mandate by the executive committee to cease buying,” Patiño said.

The operations in 2008 resulted in a net operating loss of P701 million.

The previous management also did not undertake required plant maintenance and equipment upgrade from 2007 to 2010 that led to a shutdown from January to October 2009.

Explosion forced shutdown

When the plant was restarted in January 2010, an explosion occurred at the fatty alcohol plant in April 2010 that necessitated a total shutdown. An attempt to restart in November 2010 failed.

Plant operations were only restarted on Jan. 19, 2011, until December 2011 when maintenance was required.

The plant no longer operated in 2012 due to high coconut oil costs “which made the business not viable.”

The PCGG also questioned Puno’s decision to order a retrenchment in 2009 where Cocochem lost its pool of talented and experienced plant supervisors that further led to the deterioration of operations.

Personnel who were retrenched and rehired suffered a salary cut of 40 percent.

Cocochem suffered substantial losses in 2011 due to high coconut oil prices while fatty alcohol prices dropped, according to Patiño.

Due to the shortage of coconut oil, Cocochem imported palm kernel oil that entailed additional importation costs.

In 2012, Cocochem’s losses continued “due to failure to produce product mix” along with the suspected theft of raw materials.

“To date, physical loss of coconut oil remains unexplained but pilferage is being considered as the cause,” Patiño said.

She also rued the lack of growth in the coconut production in the country that rendered oleochemical companies in the Philippines less competitive in price and quality compared to other companies in the region.

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TAGS: Business, coco levy, Company, Finance, Politics, Presidential Commission on Good Government (PCGG), sequestered, United Coconut Chemicals Inc. (Cocochem)
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