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."
