22/01/2013 (The Star) - Any move by our palm oil-producing neighbour Indonesia is bound to have an effect on us. After all, both Malaysia and Indonesia are the world's largest palm oil producers, controlling over 85% of the world's production.

Hence, when our friendly South-East Asian neighbour decided to impose a much lower palm oil export duty regime back in September 2011, our palm oil refining sector was the worst hit.

Many local refiners went into the red, with some even considering relocating to Indonesia just to get a constant cheaper supply of the oil to stay competitive.

However, in a turn of events for the better, the local palm oil sector's hope of restoring equilibrium was fulfilled on the first day of the new year when the Malaysian government finally put in place a new lower crude palm oil (CPO) export duty regime with full abolishment of the CPO export quota.

There is now a level playing field between the Malaysian refiners and their Indonesian counterparts, or so it seems.

Then, given that the current CPO price was trading below the threshold of RM2,250 per tonne that would trigger an export duty of 4.5%-8.5%, Malaysia decided to price its CPO export duty at zero for this month and next month.

This immediately drew the attention of Indonesia, which is now mulling over the idea of imposing a similar zero duty on its CPO export soon.

Under such circumstances, will local refiners be in a tight spot again and remain uncompetitive for the rest of the year?

Apparently not. From the perspective of local refiners, the local sector will not be affected by the proposal by Indonesia to introduce zero duty on its CPO. In fact, some believe that this could be a prelude to better future co-operation between the two countries to agree, in particular, on the export price mechanism that could benefit the duopolistic producers.

With the Indonesian CPO to be as competitively priced as the local CPO, Malaysian refiners can import more from Indonesia to maximise their domestic refining capacity, according to Palm Oil Refiners Association of Malaysia (Poram) CEO Mohammad Jaaffar Ahmad.

Malaysian refiners need to import CPO from Indonesia to support the local refining capacity, totalling 23.97 million tonnes annually.

Even if Indonesia did impose zero duty on its CPO, it would not be able to erode Malaysian refiners' margins as there would be no differential margins for refined, bleached and deodorised (RBD) palm oil; a level playing field for local refiners.

Also, there would be more CPO available in Malaysia for refining because there is no price advantage for local exporters to export CPO, as they would be better off selling the CPO locally to refiners as long as the local price is similar to the export price.

Hence, this will help spur the local refining capacity if there is a healthy margin between CPO and processed palm oil. Local refiners would, therefore, be able to uptake more CPO to improve their refining utilisation capacity.

In addition, they would also be able to support Poram's position in having a free flow of CPO import and export between the two countries at zero duty.