31/3/04 (The Jakarta Post)  Kuala Lumpur -  Indonesia and Malaysia have agreed to form a strategic alliance to produce, market and export crude palm oil (CPO), with business players assuming the collaborative effort as an attempt to form a cartel and thereby control the price of the commodity on the international market.

Vice President Jusuf Kalla, who is on a visit to Malaysia, and Malaysian Deputy Prime Minister Datuk Seri Najib bin Abdul Razak mapped out the shape of the collaborative venture during a closed-doors meeting on Wednesday.

"We have agreed to boost the production and marketing of CPO by forming a strategic alliance. Malaysia has the capital and technical management skills while Indonesia has abundant land and labor," said Najib during a press conference.

While several rounds of negotiations would still be needed before the alliance would actually come into being, Najib dismissed speculation that the collaboration was intended to lead to the forming of some kind of cartel.

Malaysia and Indonesia now account for 84 percent of global production of CPO and 88 percent of global CPO exports.

China's removal of import quotas for edible oils, a campaign in the U.S. promoting the use of healthier vegetable oils, and rising demand for CPO in the production of a biofuel are all expected to boost consumption of the "wonder oil".

"With demand for biofuel on the rise, we expect that the alliance will benefit the industry, and the economies of the two countries. We also hope that this cooperative venture will be successful, as has happened in the case of rubber," said Kalla.

With crude palm oil production forecast to reach 15.2 million tons this year, Indonesia is likely to overtake Malaysia as the top producer in the world. Malaysia is currently running out of land for new oil palm plantations, and is suffering from rising labor costs.

Malaysian investment currently accounts for up to 30 percent of Indonesia's total CPO production. The neighboring country has a more advanced and established promotion board for the commodity and a clear-cut plan on where it wants to see the industry going.

With the creation of the alliance, Indonesia and Malaysia should be able to boost their bargaining power in setting CPO prices and in controlling output so as to maintain higher prices.

"This alliance could be categorized as a cartel as it will include the control of prices. The two countries can do that as they account most of the world's CPO production," Halim Kalla, chairman for the Malaysian business department at the Indonesian Chamber of Commerce and Industry (Kadin), told The Jakarta Post.

Halim, who is the younger brother of Vice President Kalla and a top executive at the family-owned Hadji Kalla Group, said Kadin would help Malaysian investors seeking plantation land and business partners for developing CPO plantations in Indonesia.

However, Kadin has urged the government to require Malaysian CPO businesses establishing oil palm plantations in Indonesia to sell some of their production on the local market so as to help develop the downstream industry.

Currently, Indonesia is still largely involved in the upstream level of the sector, with only a few large companies having an almost complete upstream to downstream presence.