The Palm Oil

Oil palm, Elaeis guineensis, was introduced to Malaya in 1870 from West Africa. This hardy crop starts bearing fruit within 2 1/2 to 3 years and keeps bearing fruit for up to 25 years, making it the longest yielding crop in the world.

The fleshy outer layer produces crude palm oil and the seed yields palm kernel oil.

Palm oil is used in a variety of industries from the commercial manufacturing of food and beauty products to the manufacturing of non-food products.

Tuesday, January 1, 2013

Challenging Times Ahead

31/12/2012 (Business Times) - SEPTEMBER 11 2011 is the date Palm Oil Refiners Association of Malaysia (Poram) members will always remember. 

It was the day the Indonesian government announced its intention to widen the tax gap between crude and refined palm oil.

This made crude palm oil (CPO) and crude palm kernel oil very cheap for downstream businesses in Indonesia. 

On top of that, processed palm oil in the form of cooking oil, soaps and detergents shipped out from there are minimally-taxed.

Indonesia's move, since October 2011, created an unfair playing field as refiners in Malaysia found it difficult to source for affordable feedstock. 

Price cutting ensued as refiners, oleochemicals, specialty chemicals, specialty fats and biodiesel producers in Malaysia fight for their survival.

As downstream businesses in Malaysia bled losses, those in Indonesia laughed all the way to the bank. Oil palm planters in both countries, however, have to contend with falling prices.

Poram chief executive officer Mohammad Jaaffar Ahmad noted that besides refiners in Indonesia, the biggest gainers are palm oil consumers around the world, while the biggest losers are oil palm planters in Malaysia and Indonesia.

"With falling prices, it's not a surprise that palm oil exports is not able to match last year's record high of RM80 billion," he said.

In the first 11 months of this year, the Malaysian Palm Oil Board reported the country had only shipped out RM65.89 billion worth of palm oil products. 

China, Malaysia's biggest palm oil client had so far only bought 3.15 million tonnes. This is a 14 per cent shortfall from 3.67 million tonnes, posted a year ago.

Jaaffar noted China imports more than three quarters of its cooking oils and bakery fat demand. Palm oil is the second most consumed there after soyaoil.

Last week, Oil World forecasts China likely to import 61.7 million tonnes of soyabeans from the United States, Brazil and Argentina next year, four per cent more than this year's 59.2 million tonnes.

Jaaffar explained that in the last few years, China had started to import more soyabeans instead of soyaoil because it wants more crushing of soyabeans to get more soyameal to feed its pig, cattle, dairy and poultry farms.

On the other hand, India, Malaysia's second biggest market, bought 2.35 million tonnes of palm oil. This worked out to be 53 per cent more than last year's 1.54 million tonnes.
Higher shipments into India was prompted by policy changes in India and Malaysia.

Since July 2012, India, which imports more than half of its total vegetable oil consumption of about 16 million tonnes a year, ended a six-year freeze on the base import price of refined palm olein, allowing easier imports of CPO. 

At the same time, the Malaysian government waived export duty on five million tonnes of CPO, assuming more CPO exports to India would drive down stock level and prompt palm oil prices to rise again. 

However, it did not materialise. This is because the exports of more duty-free CPO dimmed the investment climate for refiners. 

"Poram members operated at half capacity and this itself was strong enough justification to keep CPO for downstream businesses. Every tonne of duty-free CPO exports resulted in loss of market potential for every tonne of refined oil," Jaaffar said.

"It was not just the sacrifice of CPO because refiners also produce olein, stearin, palm fatty acid distillate and palm kernel oil for the oleochemical, specialty chemicals, specialty fats and biodiesel sectors," he added.

Ancillary services supporting these businesses such as logistics, packaging and bulking facilities continued to suffer.

As palm oil stock level continues to rise and prices suddenly plunged in October, the government was compelled to respond to refiners' plea. 

The policy change to lower the tax from the 23 per cent and stop exports of duty-free CPO, however, was not immediate. 

"It's better late than never," Jaaffar heaved a sigh of relief. 

From tomorrow onwards, the 2013 palm oil tax structure will be lowered from 23 per cent to stagger at between 4.5 per cent and 8.5 per cent. 

If palm oil price hovers between RM2,250 and RM2,400 a tonne, the tax is 4.5 per cent. And if the palm oil prices were to jump to RM3,450 per tonne, the tax is 8.5 per cent.

Designed to fluctuate on a monthly basis, February's palm oil tariffs will be announced on January 15. 

Jaaffar said since Malaysia's new palm oil tax structure will be similar to that of Indonesia, refiners here would stand a better chance to buy up more CPO and reduce the current high stock levels in the country.

This will spur refining activities and players would be able to reap economies of scale and make some money to stay in the business.

Asked on the outlook for 2013, Jaaffar expressed cautious optimism. His reservation stems from possible rejection of palm cooking oil shipment to China.

Every year, China's food processing companies spend billions of dollars to buy close to four million tonnes of the kitchen staple from Malaysia.

"Effective January 1 2013, palm oil shipments into China that do not meet the 2009 edible oils quality control specification will be turned away," said Jaaffar.

Despite Poram's appeals on the practicalities of trading in meeting China's Inspection and Quarantine Bureau specification, it seems "off-spec" shipment can no longer be re-refined at its shores. 

This is not in line with the usual trading norms. 

Jaaffar is concerned China's move may re-ignite similar demands from other palm oil clients. 

As early as in the late 1970s to early 1980s, trading corporations in Pakistan and India had demanded for guaranteed landing quality and weight without wanting to pay for cost-adding arrangements.

If palm oil exporters were to surrender to demands that are not of the usual business practice, this exposes them to risks of being manipulated without any explicit avenue to legal redress or compensation. "What redress can our members avail to?" he asked.

With a heavy sigh, Jaaffar said Poram has no choice, but to advise exporters to be cautious when selling palm oil to China. 

"Our members will be trading at their own risks.",204,203,200_PIsitb-sticker-arrow-click,TopRight,35,-76_AA300_SH20_OU01_.jpg