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." 

 

China To Enforce Rules on Palm Oil

27/12/2012 (New Straits Times) - Malaysia’s palm oil exporters will be trading at their own risk when selling cooking oil to China as the world’s most populous nation seeks to enforce rules, which were introduced in 2009.

“We are unable to yield to China’s cost-adding measures that are not of usual business practice,” said Palm Oil Refiners’ Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad.

This dilemma has wide implications because China is Malaysia’s biggest trading partner.

One of Malaysia’s significant exports to China is palm cooking oil for daily use. Every year, China spends some US$4 billion (RM12.3 billion) to buy close to four million tonnes of the kitchen staple from Malaysia.

It was reported that from Jan 1, China’s Inspection and Quarantine Bureau will start  enforcing a new set of technical specifications requiring the quality of imported edible oils to be of "landed quality" instead of "shipped quality".

Palm oil shipments into China that do not meet the new specifications would be turned away, said Jaaffar.

Explaining the implications of the new rules on imported edible oils, he likened the process to a consumer buying fruits from the supermarket and bringing them home.

"If you buy apples from the supermarket, you accept the quality as it is, at the time of purchase. You do not hold the supermarket responsible if, on the way home, the apples get bruised or deteriorate in quality because of oxidation from the high heat of your car parked under the sun."

The move seems to hold palm oil exporters responsible for the deterioration of the oil although the price paid is not that of door-to-door delivery.

"If the Chinese quarantine authorities want guaranteed landing quality, new cost-adding arrangements have to be paid for."

Jaaffar said the problem was not new as in the late 1970s to early 1980s, trading corporations in Pakistan and India had insisted on similar demands without wanting to pay for cost-adding arrangements.

"At that time, India and Pakistan wanted guaranteed landing quality and weight. After years of negotiation, we finally came to a compromise to give in to the cargo weight (final) but we cannot offer the quality for the same price."

Now, this demand, which was over and above trading norms, was being revisited with China.

"We've appealed on the practicalities of trading in meeting the new technical specification but the Chinese authorities seem to insist that 'off-spec' shipments will no longer be allowed to be re-refined at its shores.

"We are aware that authorities from China and Malaysia need to ensure imported cooking oil remains affordable and safe to consume by China's 1.3 billion population and, at the same time, reap steady income for palm oil exporters here," Jaaffar said.

In April last year, during his second official visit to Malaysia, Premier Wen Jiabao promised Prime Minister Datuk Seri Najib Razak closer diplomatic and trade ties.

Even though China had long been running a trade deficit with Malaysia, Wen reportedly said China had no complaints. In fact, China agreed to continue buying Malaysian palm oil.

"Malaysia and China are facing economic development challenges. Therefore, with deep cooperation, we can deal with such challenges and fulfil our mutual interests," Wen reportedly said.

Jaaffar expressed hope that both countries would come up with mutually beneficial arrangements.

"It is in the interest of Chinese consumers that they should be able to go on buying affordable and nutritious cooking oil. It is also in the interest of palm oil exporters that shipments into China should not be rejected for reasons they have no control over."