Planters' forum: At the third annual The Star Roundtable on Palm Oil, (from left) Tan Sri Dr Yusof Basiron, Datuk Lee Yeow Chor,
Hanim Adnan, M. Shanmugam, Paul Wong, Joseph Tek and Yong Chee Kong.

25/10/2014 (The Star) - For the plantation sector, will zero CPO export duty help the industry as a whole?

Yong: It will definitely help to reduce stock level and make palm oil more competitive. Notwithstanding this, it is also vital that we continually develop new markets for palm oil so as to boost demand and enhance value creation, thus reducing palm oil’s dependence on demand from the conventional food and fuel markets. In this regard, we should look at expanding into high performance products such as specialty chemicals, where the market is bigger. There are technologies that we can use on palm oil to produce superior substitutes for petrochemical-based products.

Genting Plantations is embracing such technology and plans to build a “biorefinery” – the first in Malaysia – where palm oil will be used as feedstock. We hope to produce specialty chemicals, which can match or even be more superior than petroleum-based products in the lubricant, surfactant and detergent market. We will be able to produce these high-performance products at only a fraction of the investment and manufacturing costs needed in the conventional petroleum-based process.

Diversifying palm oil usage (like what Yong says) is one solution to overcome the trends affecting the commodity market. Is there a way to diversify palm oil away from just for food and fuel-based products?

Lee: I think we (Malaysian plantation companies) are very lucky given the different uses of palm oil in the chemicals, food, fuel sectors and so on. Traditionally, the lower value-added product is cooking oil. Further down the chain is the specialty oils and fats sector, where it will involve food products such as confectionery, bakery and savoury products.

More recently, IOI Group has a venture in the nutritional food area whereby we are developing Betapol, which can mimic the fat composition of mother’s milk. Many Malaysian companies have also participated in the oleochemicals sector in the past 25 years. We are in fact the pioneer in this field particularly for vegetable oil-based oleochemicals. However, in terms of speciality chemicals, Malaysia is still a bit behind compared to other global players that are involved in specialised areas such as MCTs, olefins, plastics derivatives and PVC.

All in all, this is very promising for palm oil and will be a direction that can add value to our precious commodity.

Wong: On the structured exempt duty on CPO export, some may wonder how Malaysia is able to come up with a decision. But if you look at the current palm oil tax structure, anything less than RM2,250 per tonne is actually exempted. The real exemption is no doubt in September, with exports volume increased by 26%.

Now, CPO traders and producers are looking at November and December for more certainties to decide on their next course of action. On the price movement, I concur with Tan Sri Yusof that demand and supply elements play a major part in the price movement of palm oil together with the movement of the various vegetable oils, crude oil as well as the ringgit.

Tek: Basically the palm oil industry had a perfect storm which led us to swim in supply this year. This was set against a confluence of bearish factors in play, such as occurrence of El Nino in 2014 being dialled back, other annual edible soft oils such as soybean having bumper crop, along with lower crude oil prices and currency exchange effect. Unfortunately, all these were not within our controls. For now, I agree that zero CPO export duty would help boost sales. But, Indonesia will also follow suit. So, beyond October-November this year, both Malaysia and Indonesia can be expected to closely monitor each other’s policy. Perhaps the question that can help in managing CPO sales and logistics is an enhanced clarity on how long the Government would retain CPO export duty exemption.

How long should the Government retain this zero tax incentive?

Wong: The key issue here is that if you drag on (zero tax) too long, the palm oil refiners will suffer. There must be a balance in the approach.

Lee: A close look at the September figures shows that CPO export has gone up quite significantly while the refined palm oil export has come down quite significantly as well. The “zerorising” of the CPO export duty is to give a level playing field to both upstream and downstream players. However, it also brings about the issue where palm oil refining industry players are starting to discover negative margins on refining and fractionating palm oil. That means there is no point in refining/fractionating palm oil now. Instead players will just export CPO directly (given the zero export duty). So, the situation now could be, while the CPO sales volume may go up, how much the volume of refined palm oil will come down? Hence, we must watch out that the competitive edge doesn’t get distorted. Also, don’t forget that refined palm oil actually creates more value for Malaysia’s economy.

Is there a tax war between Malaysia and Indonesia by “zerorising” the CPO export duty?

Lee: The zero tax follows the tariff structure that has been put in place for the past two to three years. The tariff structure for Indonesia says if the palm oil price is below US$750 per tonne, there will be no export duty. In other words, the structure has been there all the time. So it is not a tax war, but a structure that was well thought out to justify it. If CPO price is already so low, why do you need to impose a duty just to make it less competitive?

Yusof: The formula says that at low price, export duty is zero. That is why both countries are doing it. But I think our plantation industry is mindful of the fact that by November and December if the crops are still high then it would have a bearish impact on prices. What we call stock rationalisation is always in the mind of the authorities to make sure the industry does not unnecessarily suffer from high stocks, which will have a direct impact on prices. So, we probably need to weigh how fast our palm oil export is moving out now so that there is no build up of stocks by year-end like what happened in 2012 (when stocks hit a historic high of 2.63 million tonnes).

Considering the dynamics where it is all about supply and demand, should planters quickly adapt to become price takers instead of trying to be price setters?

Tek: Unfortunately, Malaysian oil palm planters possibly could not become “price makers” as CPO is a commodity and its volume for export is huge. Yes, there will be price cycles of ups and downs which are the norm in basically all commodity businesses. Notwithstanding this, if we can establish effective “price safety nets” with enhanced and supporting policies and in our operations, it will help to provide a better “cushioning effect” when the prices are down. For example, if we can also extend replanting incentives beyond the smallholders only, we will see more areas with old trees replanted and further support to reduce production. Apart from replanting, the move by the Government to have the flexibility of switching from B5 to B7 or beyond in our biodiesel programme can also be considered. By being affirmative in rolling out the national biodiesel mandate, it will certainly help to provide some safety net allowing Malaysia to leverage against low prices. We can take note that Indonesia’s biodiesel programme which was expected to consume huge quantities of CPO was viewed bullishly by the market.

Yong: To begin with, the B5 programme is not solely aimed at influencing palm oil prices but is part of the Government’s broader renewable energy policy. Further, the B5 programme addresses the subsidised sector and not the industrial sector yet. So, it will only take up about half of the 500,000 tonnes from our palm oil stockpile. Nevertheless, I think the B5 and B7 mandates will help bring down the stocks level. The mandate should be expanded to B10.

Is it possible to have such flexibility to convert from B5 to B7 and also, B10?

Wong: The Government has been talking about migrating from B5 to B7, possibly in 2015. In fact, a lot of car manufacturers have given the guarantee to accept B7. For peninsular Malaysia, the mandate has been implemented for the subsidised sector. Sabah is also ready to go ahead but Sarawak is currently waiting for Petronas and Shell to provide blending facilities.

For Sarawak, there will probably be four key regions, of which Miri and Sibu will be ready by this December. The biodiesel facility in Bintulu is expected to operate this month by Sarawak Oil Palms Bhd and should be able to supply biodiesel in Sarawak soon.

Lee: If you average out 700,000 tonnes per year for B7, it is only 60,000 tonnes per month compared with the monthly palm oil export volume of 1.6 million tonnes a month. Realistically, it is not that much (to reduce the stockpile).

However, I think it is good. Besides achieving the country’s green energy aspirations, it will help to set a minimum benchmark for CPO because prices will always fluctuate. But what we don’t want to see is CPO prices going down below planters’ cost of production. So, if we have a good biodiesel mandate which is flexible, when the palm oil price is high, we need not go to B7 (because the feedstock will be expensive and does not make any sense to burn palm oil). But if CPO price is down, then B7 or even a higher grade fuel can come in to support palm oil prices and reduce stocks. This will help to set a minimum benchmark price for CPO, which will provide a decent return to palm oil producers including the smallholders.

Yusof: The biodiesel blending facility is an in-line computerised blending mechanism. You can press the button for 5% palm methyl ester to be mixed with 95% fossil fuel. In peninsular Malaysia, all these blending facilities have already been installed. The facility in Sabah and Sarawak are also almost ready. The implementation for the biodiesel programme is to be done in stages depending on the readiness of the blending facilities to be installed at the designated depots, where the petroleum companies’ bulking installation are located. Perhaps, Sarawak and Sabah need not implement B5 and jump straight to the production of B7. So, you cannot fault the Government for the delay in the nationwide implementation because we do not want to force hardship on petroleum companies, oil palm plantations and consumers.