Wednesday July 27, 2005, 4:53 pm - JAKARTA (Dow Jones)--Malaysia'srecent move to let its currency appreciate against the U.S. dollar ispositive for Indonesian palm oil producers in general, but lingeringinfrastructure and productivity bottlenecks will prevent the gains fromfully trickling down, trade participants said Wednesday.Poor infrastructure, which prevents efficient movement of crude palm oilproduced in interior provinces, and low productivity in Indonesianplantations will mostly negate the advantages from a stronger ringgit thathas made Malaysian palm oil less competitive in the international market,he said."It won't have much impact on our exports, unless we can solve thoseproblems," said Benny Tjoeng, vice president of major CPO producer PTAstra Agro Lestari.

However, many expect the overall impact to be still positive.

"It will be easier for us to compete with Malaysia in the internationalmarket," said Derom Bangun, chairman of Indonesian Palm Oil ProducersAssociation, or Gapki.Indonesia, the world's second largest crude palm oil producer afterMalaysia, produced 12.4 million tons of CPO in 2004, with 80% of it beingexported.The ringgit has strengthened about 1.3% against the U.S. dollar sinceThursday when the currency was unpegged and moved to a managed float underwhich it will be allowed to move against a basket of currencies. Theringgit had been pegged at 3.80 ringgit to the dollar since September1998.The Malaysian move came close on the heels of a decision by China whichalso said Thursday that its currency, the yuan, will move against a basketof currencies as opposed to the earlier practice where it was pegged at8.28 to the dollar.A stronger ringgit has meant Malaysian exporters will now earn less inringgit when they export palm oil products priced mostly in U.S. dollars.The change has already been reflected in the ringgit-denominated CPOfutures prices on Bursa Malaysia Derivative, with the benchmark Octobercontract falling to MYR1,366/ton Wednesday from MYR1,408 at the close July21, before the policy change was announced.

Malaysian Investment In Indonesia To Get A Boost

On the positive side, however, a stronger currency will leave more fundsin the hands of Malaysian plantation companies to invest in Indonesia.Faced with limited land available for expansion of plantation areas, mostMalaysian companies are already looking at Indonesian investmentopportunities.Indonesia's Agriculture Ministry recently said it plans to developthousands of hectares of palm oil plantations along the boarder withMalaysia in Kalimantan. The ministry is hoping foreign investors will fundmost of this development."It depends on how we can make the investment climate more attractive toinvestors," Tjoeng said. "Even if Malaysian companies have more money(now), they won't invest if the investment climate remains unfavorable."MYR Changes Cause Uncertainty In The MarketA more flexible ringgit value, however, can bring with it some level ofuncertainty to the market, said palm oil producers."Aside from supply and demand in the palm oil and soyoil markets, currencymovements will now start affecting prices," said Tjoeng.Indonesian traders say they expect the ringgit to appreciate further inthe coming months, putting pressure on Malaysian CPO prices."We expect the ringgit to appreciate around 5% in the future," said atrader in Jakarta.Meanwhile, some Indonesian traders have started using European prices as abenchmark while they wait for Malaysian prices to settle down."We have decided to use prices in Rotterdam to set palm oil prices untilMalaysian prices stabilize," said Gathut Arudi, marketing manager atplantation company PT Bakrie Sumatera Plantations (UNSP.JK).Tuesday, Indonesia's RBD palm olein was offered at IDR4,225 a kilogram,unchanged from Monday's levels. CPO in Medan was traded at IDR3,785/kg,down from IDR3,879/kg last week, in line with lower Malaysian prices.