27/12/2011 (The Star) - Indonesia's move to further lower its crude palm oil (CPO) export duty from 20% to 16% in the final quarter of 2011 is giving an additional headache to Malaysian palm oil refiners, oleochemicals and biofuel operators alike.

This drastic move has put Indonesian palm oil refiners in an advantageous situation, whereby they can buy their CPO feedstock at a 16% discount, or about RM450 per tonne lower, than the actual CPO market price.

Assuming the market price for CPO is at RM3,000 per tonne, Indonesian refiners can now obtain it at about RM2,550 per tonne.

This, coupled with their processing cost for refining at about RM200 per tonne, and after paying the export tax for processed palm oil at about RM50 per tonne, would translate into a total production cost at just about RM2,800 per tonne for Indonesia refiners. Currently, the processed palm oil world market price is pegged at RM3,200 per tonne. This literally means that the Indonesian refining sector could easily obtain a profit margin of RM400 per tonne, as a result of the lower CPO export duty.

Indonesian refiners, therefore, can now offer “lower priced” processed palm oil for the export market than the global market price, thereby undercutting Malaysian processed palm oil exporters by a hefty RM400 per tonne.

Indonesia’s move to cut CPO export duty to 16% from 20% has given an advantage
to its palm oil refiners. — AFP

Traditionally, Indonesia was only able to offer or undercut by about RM50 to RM100 per tonne of Malaysian exporters' price prior to the lower CPO export duty.

So, will 2012 be a watershed year for the Malaysian palm oil refining, oleochemicals and biofuel sector? Will these sectors be deemed unviable with some smaller operators even having to close down their operations given the high “undercut price” by Indonesian exporters? To many local industry players, Indonesia's latest move to lower its CPO export duty is definitely a serious threat which will fast erode the profit margins of the Malaysian palm oil downstream sector.

For example, local CPO is sold to Malaysian refiners at RM3,000 per tonne with no discount or less its export duty.

With about RM150 per tonne refining cost, the total cost for producing processed palm oil in Malaysia by local refiners is about RM3,150 per tonne.

Judging by the world market price for processed palm oil at about RM3,200 per tonne, the profit margin for local refiners is only a mere RM50 per tonne.

The Government must seriously look at the grave implication borne of a situation where local refiners would only be able to get a margin of RM50 per tonne while Indonesian refiners stand to reap RM450 per tonne.

And if the price of CPO feedstock were to increase further, local refineres would soon encounter a negative margin situation.

In the world market too, local refiners would not be able to offer a lower price compared with Indonesian refiners who have the privilege of securing CPO feedstock at discounted levels.

To help “neutralise” the dire situation, it is believed that the Government is now asking Malaysian plantation companies to yet again subsidise the local refineries, oleochemicals and biofuels sector for up to RM2bil a year.

This apparently does not sit well with local plantation companies as it would mean their taxes are bound to increase from 46% to about 60%.

As it is, plantation companies are already overtaxed compared with other companies, which are paying about 25% in corporate tax.