Meanwhile, read the below very well written article via Reuters on the competing arm of the Indonesian palm oil industry which will provide the much bitter competition against Malaysian palm.
Top palm oil producer Indonesia wants to be more refined
First
Read
Written
by Michael Taylor, Niluksi Koswanage & Chew Yee Kiat
Monday,
16 July 2012 10:22
JAKARTA/KUALA
LUMPUR (July 16): For decades, Indonesia has shipped out tanker loads of raw
palm oil for processing into higher value cooking oil and margarine in
Rotterdam, Mumbai and Kuala Lumpur. Now, the world's No 1 producer of the
edible oil is seeing a more than US$2.5 billion (RM7.95 billion) wave of
investment to build a refining industry that will double its capacity and mean
it could supply the entire needs of Asia's top food consumers - India and
China.
The
transformation - driven by Indonesia's move to slash export duties for
processed oil last October - will heat up competition with rivals such as
Malaysia and send ripples through the palm oil market as new supply pressures
prices of traded refined products such as palm olein, used as cooking oil.
A
Reuters survey of 30 firms operating in Indonesia - from the world's biggest
listed palm oil firm Wilmar to conglomerate Unilever - shows plans to nearly
double refining capacity to 43 million tonnes of palm oil, or 80 percent of
total world output. "The government is sending a clear message - to survive,
you need a refinery. So the palm oil firms are putting their money out and
following the big guys in the industry who have already done so," said
Thomas Mielke, an analyst at industry publication Oil World.
"There
is the threat of over capacity. But palm oil firms with the whole supply chain
behind them, we are talking about having plantations to mills and ports, will
be the kings." Gleaming silver storage tanks standing ten-storeys' high
are becoming a feature of Indonesia's landscape as more refineries spring
up, threatening the stranglehold on processing held by neighbouring Malaysia,
the No.2 palm oil producer. At a newly built refinery near Jakarta, staff
wearing face masks and hair caps work on conveyor belts carrying boxes of margarine
and cooking oil.
The
US$249-million Marunda plant run by PT SMART was launched before the tax change
and Indonesia's top palm oil firm plans to spend a further US$200 million on
new refining capacity despite the infrastructure issues it faced building
Marunda. PT SMART will be one of the biggest investors in the sector along with
Wilmar and unlisted Musim Mas, which plans to spend US$860 million, according
to the survey.
Government
officials in Malaysia and Indonesia say these firms had aggressively lobbied
Jakarta to cut duties on refined palm oil to half those levied on crude. Much
of the expansion is led by companies owned by powerful tycoons in Indonesia.
SMART is controlled by the family of Eka Tjipta Widjaja, who created a palm oil
empire from his humble start selling biscuits from a rickshaw. Foreign firms
are not far behind. Commodities trader Louis Dreyfus formed joint ventures with
planters such as Singapore listed Kencana Agri to build refineries in
Indonesia.
Until
now, Indonesia had focused on expanding plantations. Oil palms cover roughly
8.2 million hectares (20.3 million acres), an area about the size of the island
of Ireland, and their cultivation is often blamed for rainforest destruction.
BRING
DOWN PRICES
Palm
oil, the world's most traded and consumed edible oil, is used mainly as an
ingredient in food such as biscuits and ice cream, or as a biofuel. For
decades, refined palm olein enjoyed premiums of 5-10 percent over crude palm oil
futures. But with more Indonesian supplies coming on stream, more inefficient
refining operations could get shut.
On the flip side,
greater competition could cut final product costs to the benefit of consumers
in India and China, where food inflation is a constant concern for policy
makers. So far this year, palm olein prices have fallen nearly 10 percent on
higher Indonesian supplies. Under its refining plans, Indonesia could meet
domestic needs of around 10 million tonnes annually as well as supplying the combined
20 million tonnes of edible oil imports required by top buyers China and India.
Indonesia's crude
palm oil output - estimated at 23 to 25 million tonnes in 2012 - looks set to
be outpaced by the planned increase in refining capacity in the next two years.
That means some palm oil firms may build refineries run at lower capacities
until more edible oil supply comes in. DBS analyst Ben Santoso said latecomers
to Indonesia's refining business could see margins squeezed to US$40 per tonne from
US$70, although still healthier than its main competitor.
"The
capacity of some of these smaller companies will turn idle. But let's not
forget, Malaysia's refining margin is just US$9 to US$10 a tonne," he
added.
MALAYSIA AND
INDIA FEEL THE PRESSURE
As Indonesia
rushes to build refineries, vegetable oil refiners in Malaysia and India are
feeling the pressure. "I am having sleepless nights. I have closed down
30-40 percent of my factory and I hope it won't be more," said a refiner
in Malaysia's Johor state.
Malaysia
currently has 22.9 million tonnes of refining capacity, with only about three
quarters of it used last year down from a record 90 percent in 2005. And this
shows in exports. Malaysia's combined refined palm olein exports in April and
May dropped 19 percent to about one million tonnes from a year ago, according
to cargo surveyors.
Indonesian palm
olein shipments jumped 55 percent in the same period to nearly 600,000 tonnes. Malaysia could
respond by removing a tax free export quota for crude palm used to feed the
overseas factories of some firms or replicate Indonesia's tax system to level
the playing field. Both options are politically risky with an election on the
horizon, as they entail taxing crude palm oil that in Malaysia is mostly produced
by small farmers who make up the bulk of the electorate and come under the tax
free export quota.
To capitalise on
Indonesia's export tax changes, Malaysia's top planter Sime Darby is building
an Indonesian refinery. KL Kepong and IOI Corp are expected to follow suit. India,
the world's largest edible oil buyer, has been fending off industry calls to
hike the import duty on refined palm oil to stem the inflow
of cheap cargoes from Indonesia for fear of stoking inflation. India currently
imposes a 7.5 percent tax on refined palm oil from Indonesia. But it is still
US$15 cheaper a tonne to import Indonesia's
processed palm oil than to ship in crude and refine it, traders say.
"Before
Indonesia changed the export taxes, a lot of refiners were expanding their
factories," said Ashok Sethia, President of the Solvent Extractors
Association of India. "Now all those plans have been abandoned," he
added. Refined palm olein used to make up below 5 percent of total imports and
now accounts for nearly 20 percent of 883,410 tonnes shipped into India in May.
This will make it hard for India to preserve its processing capacity of 15
million tonnes.
SENSITIVE POLICY
Palm oil is just
part of Indonesia's efforts to attract investment and squeeze more from its
agricultural and mineral resources, a policy that has sometimes backfired. In
May, Indonesia imposed a 20 percent tax on some metal ore exports and told
miners to submit plans to build smelters or process ore domestically. The government
says this should help Indonesia earn more revenue, although a union said miners
had laid off more than 200,000 workers since the ruling.
Taxes on palm oil
were introduced in 1994 with the aim of ensuring palm-based cooking oil was
available in the developing country of more than 200 million people. But the
system fell apart when the rupiah currency collapsed during the Asian financial
crisis in the late 1990s, prompting palm oil firms to
export more and triggering food riots at home. With this in mind, export taxes
on crude palm oil were kept much lower than on refined oil to shore up domestic
supply. That frustrated the processing industry with many firms thinking of
exiting Indonesia in 2010 and 2011, said Sahat Sinaga, executive director of
the Indonesian Vegetable Oil Refiners Association.
"If the
government did not take action, we would have just remained a crude palm oil
exporter and earned much less," said Sinaga." - Reuters
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