09/10/2012 (New Straits Times) - Palm oil accounts for the largest share of the global edible oil market. This is estimated to be 40 per cent.  Soya bean oil is now in second place. Malaysia and  Indonesia control almost 90 per cent of the market. More than 80 per cent of the world's palm oil comes from Malaysia and Indonesia.

Malaysia, which at one time was a leading producer, is now behind Indonesia. Production in Malaysia has stagnated at about 18 million tonnes a year. Available land is limited. The only area left for expansion is in Sarawak. Even there, expansion is constrained by deep peat soils, which cost more to develop.

Malaysia, despite some unfounded claims by non-governmental organisations, still remains committed to maintaining the country's more than 60 per cent of natural forest cover, legislated as permanent reserves. Despite this, many NGOs, for reasons best known to them, have not stopped criticising palm oil.

Since Malaysia and Indonesia control 90 per cent of the world's palm oil market, one would expect them to work together to get the best returns from palm oil. It is only logical that the two countries pursue a win-win collaboration. Unfortunately, they have not. The competition has heated up.

Recently, Indonesia changed its palm oil export duty structure, denying palm oil refineries in Malaysia marketshare.

The Indonesian government introduced new lower export duties on both crude and refined palm oils. The new duty regime also includes an export tax differential between the two oils. Experts agree this downward revision of the export tax structure for crude palm oil (CPO) and refined palm olein is likely to have implications for the global palm oil market.

The export marketshare between two of the world's largest exporters, Malaysia and Indonesia, will see change, most likely favouring Indonesia. As a result, many expect increased investments in the refining sector in Indonesia. The move will intensify Indonesia's competition with Malaysia. In the end, it will be a lose-lose situation for both.

Export tax on refined palm olein was reduced from 25 per cent to 13 per cent. For crude palm oil, the duty cut was smaller, from 25 per cent to 22.5 per cent. What is clear from the adjustment is that the Indonesian government wants to promote the export of processed palm oils and capture the benefit of value addition locally. This will most likely upset the refining business in markets such as India, which also deploys the duty structure to encourage downstream investments in edible oils. How would India respond?

With export tax nearly halved, the export competitiveness of Indonesian refined oils will improve considerably, at the expense of refiners in Malaysia.

At the same time, a much smaller duty reduction in crude palm oil means that for the export market, the product will continue to remain relatively more expensive and, therefore, less competitive. This, in turn, will encourage larger local sales of CPO to domestic refiners. It is also likely that CPO producers may set up fresh refining capacities to take advantage of the fiscal concession.

Given the volatility of the global vegetable oil market and somewhat fickle nature of government policies, investors will be more cautious in building new refining capacities.

But Malaysia will not keep quiet. The government recently added two million tonnes of CPO to be exempted from export duty. This may have not been well-accepted in Indonesia. But the move has also rattled the refiners in Malaysia.

Whatever it is, production and export of palm oil products is an important economic activity for Malaysia. The country can hardly afford to let go of its competitive edge or its share of the export market.

For Indonesia, the government has been facing the dilemma of having to ensure consumer-friendly palm oil prices for the domestic market and, at the same time, maximising export marketshare.

With global vegetable oil prices and palm oil prices ruling at relatively high levels for the past three years, the Indonesian government's industrial policy has begun to focus on promoting downstream and value-added production by incentivising such industries.

The problem is that it has not helped Malaysia, which has also strived for years to build its downstream business. Instead of this lose-lose fight, Indonesia and Malaysia should gang up and look for a win-win partnership.