25/07/2012 (The Star) - India's recent decision to impose higher import tax structure on processed palm oil products came as no big surprise to many industry observers.

It lifted the base price of refined palm oil imports to market prices from US$484 (RM1,535) per tonne, thus widening the price differential between crude palm oil (CPO) and processed palm oil products, especially palm olein.

Some quarters believe that India is taking a gamble in trying to “force” the concession out of major producers, Malaysia and Indonesia, to export more CPO instead of processed palm oil to support India's refining industry.

The move is also seen as a prelude to Indonesia's decision in October last year to significantly reduce its export duty on processed palm oil products to encourage the consumption of its CPO for the development of its own refining operations.

According to Oil World, India last year imported 6.74 million tonnes of palm oil, of which about 75% or 5.01 million tonnes were imported from Indonesia and about 25% or 1.68 million tonnes from Malaysia.

It is important to note that there was a sudden increase of Malaysian export of palm oil into India by about 41% last year from 1.19 million tonnes in 2010.

 
Workers unload oil palm fruits at a mill in North Sumatra. Indonesia’s palm oil export
dropped from 5.44 million tonnes in 2010 to 5.01 million tonnes in 2011 mainly because
Malaysia is exporting more CPO under its CPO duty-free quota. — Reuters

For the same period, Indonesia's palm oil export dropped from 5.44 million tonnes in 2010 to 5.01 million tonnes in 2011. The switch is mainly because Malaysia is exporting more CPO under its CPO duty-free quota.

Palm Oil Refiners Association (Poram) president Mohammad Jaaffar Ahmad told StarBiz that the increase in India's tax on processed palm oil, mainly RBD (refined, bleached and deodorised) palm olein, would mean that it would be more expensive to import palm olein from Indonesia.

It also means that palm olein from any origin, including Malaysia, will have to pay higher import tax into India.

Theoretically, to get access to Indian market, Jaaffar said, it would be preferable for Indonesia or Malaysia to sell cheaper CPO compared with the more expensive palm olein due to the higher import tax imposed by India.

Apparently, there is also no real advantage for Malaysian palm olein because under the new Indonesian export duty structure, Indonesia produces palm olein at US$50 to US$60 per tonne “cheaper” than Malaysia.

“Indonesia still has an upper hand in the pricing of palm olein and can dictate the market by offering a discount up to US$50 per tonne if it wanted to corner and/or maintain the Indian market,” he said.

For that kind of discount, Jaaffar said there was no way for any refiners in Malaysia to compete when they were already in negative refining margin domestically since early this year.

So, will Indonesia or Malaysia take the extra mile to supply more CPO to India under its new import tax regime?

Apparently, some opined that Indonesia will not likely supply or sell more CPO to India this year as the country has enough refining capacity to process palm oil by itself.

In addition, it will contradict Indonesia's current policy to promote further downstream activities such as to encourage the development of refining operations.

Jaaffar concurred that it would send out a wrong signal to both local and foreign investors, including some Malaysian companies, that have and will invest in refining projects in Indonesia.

It was reported that by 2020 or earlier, there will be about 43 million tonnes refining capacity, almost double from 24 milion tonnes currently in place. This is all the more reason to safely keep the CPO source in Indonesia.

As for Malaysia, many expect it will not continue with the CPO duty-free export quota to help India's refining mills.

“In fact, it will be a crime for the country to do that at the expense of our own refining industry,” said Jaaffar.

Malaysia's palm oil refining industry has excess capacity and strong justification to keep its CPO for the local downstream industries.

“The country cannot afford to move backwards to become a CPO exporter,” he said, adding that Malaysia should move forward for industrialisation.

Last year, Malaysia exported 3.74 million tonnes duty-free CPO and forwent a tax collection of RM2.45bil, Poram claimed.

The worst part is that for every tonne of CPO exported, it will mean loss of market potential for a tonne of processed palm oil.

Many quarters, especially Poram, are now demanding for the “subsidised export duty on CPO” to be discontinued, especially with Indonesian export duty structure on palm oil well in place.