04/10/2011 (The News International) - Indonesia and India discuss trade this week with rice and edible oils likely to be on the agenda as Jakarta faces cuts in supplies of the grain from Thailand and New Delhi considers retaliation for a hike in crude palm oil prices.

India, the world’s biggest buyer of vegetable oils, is sending Trade Minister Anand Sharma to visit Jakarta, capital of the world’s biggest palm oil producer, on Tuesday, barely a month after Indonesia moved to boost its refined palm oil exports by reducing taxes on the product, and hiking tariffs on crude palm oil.

India’s own refining industry said the step was a potential “death blow”. The visit comes only days after Indonesian Trade Minister Mari Pangestu said the country would seek alternative shipments of rice after the reported cancellation of a proposed sale of 300,000 tons of rice from Thailand.

“Indonesia to take a million of the two million India rice exports, I don’t see that happening,” said Pawan Kumar, a Singapore-based analyst at Rabobank. “It will partly take from India,” he said. “This can only happen if there is some kind of treaty, where India agree to give this, but in return you give me that.”

India, the world’s second-biggest rice producer, is sitting on a huge inventory and heading for a record harvest on the strength of normal monsoon rains. In September, a confident New Delhi said it would allow two million tons of rice exports, and the government also does some direct sales to neighbouring countries.

But its edible oils refining industry could be hard hit by Indonesia’s palm oil tax changes and the government could make imports costlier within the next two weeks. “Palm could be that commodity, because India is highly reliant on palm,” Kumar added. “If some treaty happens that way, then we might see the rice flow going towards Indonesia.”

In July, the Indonesian trade minister said the country was considering importing rice from India and Pakistan.

Indonesia mainly buys rice from Vietnam and Thailand.

The archipelago of 17,000 islands was rice self-sufficient in the early 1980s but then farmland was turned into housing estates for a booming population and it now imports about one million tons of rice.

“Rice will be a key topic,” said Ker Chung Yang, investment analyst at Phillip Futures in Singapore. “Palm oil will be one of the key trades that comes into the discussions.” Palm oil output in Indonesia is expected to be 23 million tons this year, with exports at about 17 million tons.

On Saturday, Adani Wilmar, one of India’s major importers of vegetable oils, said the country had virtually stopped buying crude palm oil after Indonesia’s tax decision to hike taxes.

Analyst Dorab Mistry had warned India could face a shortage of edible oils following the tax changes as Indonesia does not have the capacity to refine enough to meet India’s monthly guzzling of 600,000 tons of palm oil.

In addition to the edible commodities, India’s energy needs are also likely to be discussed during the meeting.

Indonesia is also the world’s top exporter of thermal coal, used to fuel power plants, and its coal export growth will be fuelled in large part by India, where power demand is expected to lift coal imports significantly over the next five years.

In January, Indonesian chief economic minister said Indonesia and India would sign an economic partnership deal worth $15 billion, including a railway in coal-rich South Sumatra worth up to $2 billion.

“India wants cheap coal from Indonesia to power their power plants,” said Andreas Bokkenheuser, a Singapore-based analyst at UBS. “There could be a trade-off but the Indonesian government has been very adamant about ensuring their coal exports are sold at competitive market prices. Otherwise, other miners will come in and ask for similar reductions.”