They don't make dairy products at the old butter factory on Bank Street, South Melbourne, any more. But they do churn out some high-end digital effects.

The latest offering from the house of Iloura has just opened in Victorian cinemas and will soon be spread lovingly across the land: the final 20 minutes or so of The SpongeBob Movie: Sponge Out of Water was created by about 120 people in this sprawling former factory, a rabbit warren of rooms, desks, corridors and pixels.

For the uninitiated, SpongeBob is a childlike and simple-minded sea sponge who lives on the ocean floor, in a town called Bikini Bottom. He flips burgers for a living (well, Krabby Patties, to be precise) and hangs out with his best friend Patrick, an even-dimmer-than-he-is starfish.

The creation of marine biologist-cum-animator Stephen Hillenburg, SpongeBob Squarepants (to given him his full name) has had his own show on kids' channel Nickelodeon since 1999. According to a 2009 report in Advertising Age, the show generates more than $8 billion worth of revenue a year for the network.

In other words. SpongeBob is hot property; you squeeze this guy at your peril.

However, that's precisely what Iloura was asked to do; take a massively popular 2D hand-drawn animated figure and turn him into a 3D CGI character, without losing whatever it is about him that made him so popular in the first place.

Oh, and also to stick him real-world environments, where he can interact with actual people, including Antonio Banderas (as a crazy pirate).

There was, says Glenn Melenhorst, Iloura's visual effects supervisor on the film, always a fair amount of concern about how a traditional 2D character would translate into 3D.

"There are a lot of rules with these characters," he explains. "From one angle SpongeBob has two cheeks, from another angle he only has one, and sometimes he has no cheeks at all. How does that happen? When does that happen?"

To some degree, he says, "The logic of a 3D world had to be distorted into a 2D aesthetic". It was all about "capturing the essence of SpongeBob as a character", while recognising that the usual rules didn't necessarily apply.

Though not quite on the scale of The Lego Movie, which was almost entirely created in Sydney by effects house Animal Logic, the SpongeBob film was the biggest job Iloura has yet done, with their work accounting for "about 25 per cent" of the film's reported $US74 million ($95 million) budget.

Melenhorst and his colleagues spoke daily to Hillenburg and director Paul Tibbitts, working through each new patch of work over the phone and via a program called Cinesync (which allows two users half a world apart to look at the same files simultaneously).

"We did our best guess, which got us most of the way there, and then they would tweak," Melenhorst says of their attempts to crack the code of how SpongeBob, Patrick and the others should behave. "It's all these things that they know - they're not written down anywhere, it's like a secret recipe in their heads - and we had to unpick that bit by bit."

From the outside, special effects work can sound a bit like death by 1000 cuts. To bid for the job, Iloura spent weeks building test characters on spec. Once they were in the door, they finessed those tests a little more. Their contribution to the finished film numbers 550 shots, but they also built another 250 or so that simply got cut.

That must be heartbreaking for the poor bunnies who work on them, I suggest.

"It's the nature of comedy," says Melenhorst. "They'll write it, rewrite it, try a different scene. There was one scene we worked on for probably six months before it got cut. If you're in this industry you have to expect that some of your best work is going to get cut, because that's just how it is."

Occasionally, though, there's a last-minute reprieve.

One of the best gags in the film, which has Patrick and SpongeBob seemingly running around the world on a fair-floss-charged sugar jag, "was out of the edit for so long," says Melenhorst's colleague Ineke Majoor, "our animators were devastated. And then they used the shot in the trailer, even though it wasn't in the film, and it did so well they moved it back into the movie."

Along with Animal Logic and Adelaide effects house Rising Sun Pictures, Iloura is increasingly focused on work for big-budget Hollywood productions. Our tax incentives (30 per cent rebate for post-production work) and technical competence means these Australian outfits can compete with rivals from around the world - the effects industry is a truly global business - but they rarely square off against each other because each has a slightly different area of specialisation.

For Iloura, whose other current projects include Mad Max: Fury Road, Alex Proyas' Gods of Egypt and Seth MacFarlane's Ted 2, that might be summed up as placing animated characters in real-world environments.

It sounds easy enough, but as Melenhorst talks me through one brief sequence featuring an Iron Man-style superhero version of the Mr Krabby character, it quickly becomes apparent that it is anything but.

"Because he is chrome, he's reflective," he says. "So in order to get the street reflected in him we had to build the entire street - which had been shot in the real world - digitally."

It's kind of insane, I say.

"Yeah," he concedes. "But if it wasn't there it wouldn't look real."

On twitter: @karlkwin