Bloomberg News

Indonesia May Sell More Palm Oil to China, Hurting Prices

October 05, 2011

(Updates price in fifth paragraph.)

Oct. 5 (Bloomberg) -- Indonesia, the world’s biggest palm oil supplier, may increase sales to China and India after export taxes were cut for refined products, weighing on global prices, said a Malaysian industry association.

The country “will find a much bigger market share especially in price-sensitive” nations like China, India and Pakistan, said Mohammad Jaaffar Ahmad, chief executive officer of the Palm Oil Refiners Association of Malaysia. “There will be some buildup in CPO stocks, and once that happens, it will definitely depress prices.” CPO refers to crude palm oil.

Prices of the tropical oil used in everything from cookies and potato chips to detergents and fuel have dropped 26 percent this year on higher harvests and concern that a global slowdown may curb demand. Declining futures may ease near record food costs that have jumped 26 percent in the past year, according to the United Nations. Indonesia and Malaysia supply more than 80 percent of the world’s palm oil.

“As Indonesian refined exports rise, they will squeeze Malaysian exporters out of some markets,” said James Fry, chairman of LMC International Ltd., an Oxford, England-based advisory company. That may increase stockpiles in Malaysia and tend to depress crude palm oil, he said in an e-mail Oct. 1.

The most-active December-delivery contract fell 0.9 percent to end at 2,785 ringgit ($874) per metric ton on the Malaysia Derivatives Exchange today, the lowest close in a year. The 26 percent drop this year was worse than the 15 percent slide in soybean oil and the 17 percent loss in the Standard & Poor’s GSCI Agriculture index of eight commodities.

More Supply

“Malaysia will have competition,” Derom Bangun, Deputy Chairman of the Indonesian Palm Oil Board, said by phone from Medan yesterday. “With more supply of course there will be a bit of correction in the price, but not much.”

The maximum export tax for refined, bleached and deodorized palm oil was reduced to 10 percent from 23 percent and the rate for RBD palm olein was cut to 13 percent from 25 percent, while the highest tax for crude palm oil was 22.5 percent, according to a Finance Ministry Decree. The changes were effective Oct. 1.

Crude oil from Malaysia is subject to a duty based on a published weekly price and averaging 25 percent, while there is no export tax on refined products, Mohammad Jaaffar said.

Refiners in Malaysia and other countries which import crude oil may face constraints as there could be less unprocessed oil from Indonesia, Mohammad Jaaffar said. Malaysia imported about 1 million tons of crude oil and 445,066 tons of crude palm kernel oil mainly from Indonesia last year, he said.

Refineries to Restart

Refining companies in Indonesia will restart idle capacity and export to India and China, said Bangun. They may have used only 30 percent to 50 percent of capacity until now, he said.

Some Malaysian companies were looking to invest in refineries in Indonesia to take advantage of the duty, said IOI Corp. Executive Director Lee Yeow Chor on Sept. 13.

Sime Darby Bhd., the world’s biggest-listed palm oil producer, is building a refinery in South Kalimantan which will have a processing capacity of 2,500 tons per day and is expected to be operational in 2013, its Chief Executive Officer Mohd Bakke Salleh said Sept. 21.

Malaysia exported 13.9 million tons of processed oil, out of 16.7 million tons of palm-oil shipments last year, board data show. Indonesia shipped 6.9 million tons of refined products out of a total of 15.7 million tons in 2010, according to the Indonesian Palm Oil Association.

--With assistance by Yoga Rusmana and Eko Listiyorini in Jakarta. Editor: James Poole

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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