02/09/05 KUALA LUMPUR (Dow Jones)--A weakening rupiah should,theoretically, be positive for Indonesia's palm oil industry at theexpense of rival Malaysia, but it is unlikely to lead to a sudden surge inIndonesian palm oil exports, industry participants said Friday.

"The (weaker) rupiah does make our CPO more competitive. But I don't thinkit will have much impact on exports," said Derom Bangun, chairman of theIndonesian Palm Oil Producers' Association, or GAPKI.

The start of the Muslim fasting month of Ramadan in October, followed bythe Idul-Fitri celebrations means a lot of palm oil would be requiredwithin the mainly Muslim country of about 240 million people, he said.

"This will support local CPO prices. The domestic market will become moreinteresting for producers (reducing the attractiveness of exports)," Deromadded.

The weakening rupiah, therefore, isn't likely to add much more to theexport growth already expected for the year.

For decades, Malaysia has been by far the world's largest producer andexporter of palm oil.

However, an abundance of cheap land and labor has allowed Indonesia tocatch up rapidly in the last few years to emerge as a close competitor toMalaysia.

Lately, the contrasting fortunes of the currencies of the two neighboringcountries had sparked speculation that Indonesia could gain anotheradvantage.

The rupiah has been weakening for most of the year, with the depreciationmost pronounced in recent weeks. In August alone, the rupiah lost about 6%against the dollar, at one point touching a 4-year low of about IDR11,900.

Meanwhile, the Malaysian ringgit has been steady. The ringgit has beenpegged at MYR3.8/dollar since September 1998 until late July, when thegovernment scrapped the fixed rate in favor of a managed float, imitatinga similar move by China.

The currency immediately strengthened to MYR3.75 and has since stabilizedat around MYR3.76-MYR3.77.

At first glance, it would appear to be an open-and-shut case that thecombination of a weaker rupiah and a stronger ringgit would makeIndonesia's palm oil more competitive than Malaysia's.

Yet, industry officials on both sides have downplayed suggestions thatIndonesia could soon be taking more market share away from Malaysia.

GAPKI is maintaining its forecast of an 11% rise in exports in 2005 to 9.6million tons.

No Aggressive Indonesian Selling Yet

As palm oil is sold in dollars in the international market, Indonesianproducers stand to reap increased export earnings in rupiah terms becauseof the currency weakness.

Not surprisingly, when the rupiah began weakening, palm oil markets wereawash with talk that Indonesia may boost export sales to cash-in on thecurrency's depreciation.

So far, however, traders said they haven't noticed sellers getting anymore aggressive than usual.

"Producers don't just sell all their CPO the moment the rupiah isweakening, but prefer to wait until things settle down and there's clearerdirection from the rupiah," a trader in Jakarta said.

Demand from major consumers has been also uninspiring lately, limitingroom for palm oil producers to sell more.

Ample supply of edible oils in domestic markets and uncertainty about thesupply and demand outlook for global oilseeds for the coming year haveprompted many importers in major markets such as China and India to adopta hand-to-mouth approach in a bid to reduce exposure to pricefluctuations, traders said.

Traders said if anything, the rupiah's depreciation has sapped tradingactivity.

They said the currency was still in a volatile state, making it difficultfor market participants on both the buy and sell side to quote prices.

The rupiah has been fluctuating against the dollar within intra-day rangesof IDR200-IDR300 recently.

"The rupiah can change so much within a single day. For example, sellersmay decide to quote one price early in the day when the rupiah is down alot, but when they see the rupiah rebound, they have to work out theirpricing again," said a trader in Malaysia, who also deals in Indonesianpalm oil. "So, people prefer to wait for things to stabilize."

Malaysia CPO Rises Despite Weak RupiahHowever, if the rupiah stabilizes at a significantly weaker level thanearlier in the long-run, the increased competitiveness of Indonesian palmoil in terms of pricing would be undeniable, industry officials said.

Although Malaysian prices are used as a benchmark in the trading of palmoil in the international market, it is widely known that Indonesiansellers can offer discounts to lure buyers.

While lower production costs already give Indonesian producers a pricingadvantage, currency conversion gains can further raise their flexibilityon the pricing front.

Still, the Malaysian palm oil industry is yet to show concern at thestrength of the ringgit against the rupiah as illustrated by theperformance of Malaysian CPO prices in past weeks.

Even as the rupiah has been weakening, the benchmark third-month CPOfutures contract on Bursa Malaysia Derivatives has been firm, risingslightly from a low of MYR1,329/ton in early August to around MYR1,380/toncurrently.

Azizi Meor Ngah, chief executive of the Malaysian Palm Oil Association,said cheaper Indonesian products doesn't necessarily mean Malaysia wouldbe at a disadvantage.

Logistics and holding costs should also be taken into account asMalaysia's port and transport infrastructure is known to be superior to inIndonesia, where the palm oil industry is highly fragmented and stillmainly dominated by small holders.

"Given the higher fuel prices, it would cost (Indonesia) more to take theCPO out of the interiors and to the ports," Azizi said.

Moreover, increasingly stringent global food safety and qualityrequirements are also working out in Malaysia's favor as Indonesian palmoil, though cheaper, is still viewed with some skepticism among consumers,particularly in more mature markets such as Europe.

"We will see strong competition. But there are also certain advantagesthat we (Malaysia) have," Azizi said.

On the other hand, a weaker rupiah could also become beneficial for theMalaysian palm oil industry as it would open up more opportunities forplantation companies to invest in Indonesia, Azizi said.

There are over 20 Malaysian companies already operating in Indonesia.