02/12/2011 (The Star) - Palm oil stocks in Malaysia are set to rise if the Government does not change policies in response to top supplier Indonesia imposing export tax differentials that favour shipping out refined products, a top analyst said.

James Fry, chairman of commodities consultancy LMC International, said that processed palm oil inventories would grow as the No. 2 producer struggled to keep market share with Indonesian exporters getting a price edge in shipping out more refined products.

And eventually that would lead to a decline in demand for crude palm oil (CPO) for processing, further building up stocks in Malaysia.

“This is if the Malaysian government does not do anything about its tax-free export quotas for crude palm oil,” Fry told Reuters on the sidelines of the Indonesian Palm Oil Conference in Bali. “I think they will do something. But for now, stocks will grow if we just focus on this issue in isolation.”

Fry declined to give a projection for Malaysia’s palm oil stocks, which include crude and refined grades, but said the effect would be apparent as more Indonesian refineries get revived and investments pour in for constructing processing plants.

Stocks are starting to come off in Malaysia on a seasonal slowdown in production and good export demand. In October, stocks dropped from the 21-month high seen in September.

With Indonesia more than halving its refined palm oil export taxes and keeping CPO taxes virtually unchanged in September, more of the crude edible oil will get channelled to domestic plants.

That is limiting supply for Malaysia where CPO output has slowed on limited acreage, raising refining feedstock costs.

What is aggravating the situation is Malaysia enforcing its annual duty-free palm oil export quota, which this year was set at 3.3 million tonnes for selected planters, squeezing domestic supply.

Malaysia does not tax refined palm exports but it imposes a high duty for CPO shipment to protect its refineries. — Reuters

“Malaysia’s refined palm oil is more expensive compared with Indonesia’s. Stocks will build up and eventually we will see prices come off,” Fry said. “Malaysian producers can become distressed sellers since you can’t store the oil for too long.”

Production in Indonesia and Malaysia, which accounts for 85% of supply, was not going to be as bad as the market expected thanks to strong yield growth in the past few months, Fry said.

“Year-on-year, production towards the end of 2011 is showing some growth and probably it will be the same for next year,” he said. “Some in the market are getting too worried about the seasonal yield declines at the end of the year due to the monsoon weather when this should have been priced in.”

Traders have said production in Malaysia, which issues regular industry data, will drop 15%–18% in November. Palm oil futures hit a five-month high in late November before coming on the uncertain macroeconomic outlook.

“We cannot forget that Indonesia will provide the bulk of the production growth with more acreage coming into maturity,” Fry said. — Reuters.