THE palm oil price war between Indonesia and Malaysia – the world’s two largest producers – needs to be resolved fast as it is a no-win situation for both countries if prolonged.
Malaysian Palm Oil Council (MPOC) chief executive officer Tan Sri Dr Yusof Basiron said a price war has been shown to be detrimental to Malaysian and Indonesian palm oil export revenue. “The two countries should rationalise a more effective tax system and harmonise tax rates to avoid a price war, ” he said.
Despite Malaysia leading the way in establishing new markets to generate more uptake of palm oil, the country’s hard-earned markets were lost to Indonesia due to price undercutting, afforded by the latter’s market distorting tax structure, said Dr Yusof in his paperMalaysian Palm Oil: Creating New Drivers For Greater Global Market Penetration at the MPOC-organised Reach & Remind Friends Of The Industry Seminar 2016 and Dialogue in Kuching on Tuesday.
“Price undercutting for the palm oil market by Indonesian exporters is driven by the differentiated duty structure for crude palm oil (CPO) and processed palm oil (PPO), and the way palm oil producers are only paid discounted prices for their fresh fruit bunches to account for the export tax.
“When PPO is charged an export tax of 3% + US$20/tonne and CPO is taxed at 9% + US$50/tonne, the PPO exporter has a margin of 6% + US$30/tonne.
“And for packed products and biodiesel which are not taxed in % terms, the Indonesian palm oil exporter has an even bigger margin to undercut prices in the international markets, including cross-subsidising CPO from gains in certain products when competing against Malaysian exporters,” he said.
Dr Yusof said that under Indonesia’s new export tax structure, duty differential between refined palm oil and CPO has widened, thus encouraging greater production of refined palm oil – resulting in increased competition with Malaysia in refined products.
Under the old structure, the export tax on CPO was 12.5% and this was lowered to 9% under the new structure introduced in September 2014. The export tax for RBD palm olein was reduced to 3% from 12.5% while under the new structure, there was zero tax on RBD palm oil, RBD palm stearin and biofuel against 11%, 7.5% and 2% respectively previously.
Last July, Indonesia imposed another new palm oil products export levy, with the levy collected regardless of the CPO price. The levy for CPO is US$50/tonne exported.
Dr Yusof said the Indonesian logic was that in the short term, the levy would make Indonesian palm oil industry less competitive as producers had to bear the additional costs of the levy. In addition, local CPO price could decline and trade at as much as US$50/tonne below international CPO price. The long-term impact is that the levy is expected to boost international price of CPO as an additional 5.5 million tonnes of CPO would be used in the domestic market for biodiesel.
Dr Yusof also highlighted that the discounts offered by Indonesia over Malaysia for CPO/CPKO (crude palm kernel oil) is between US$15 and US$25 per tonne while that of RBD PO and RBD PL is between US$30 and US$40. It is US$50 to US$70 for RBD palm stearin.
“Indonesia has failed to recognise that when it introduces new tax structure, Malaysia will respond (accordingly) to recover its market share. The only way for Malaysia to recover our market share is to lower prices. Both Malaysia and Indonesia lose out eventually because of lower prices,” said Dr Yusof.
He said lack of export competitiveness has reduced Malaysian palm oil exports in many markets and also forced stocks to increase in Malaysia. This has led to palm oil prices declining as Malaysian exporters lowered prices to make sales possible.
According to Dr Yusof, Malaysia’s palm oil market share in China fell to 45.72% last year from 59.53% in 2010 but that of Indonesia rose to 53.97% from 40.17% during the same period. Similarly, Malaysia’s market share in the United States dropped to 54.03% from 93.44% while that of Indonesia rose to 44.49% from a mere 5.12%.
As the undercutting continued, both Malaysia and Indonesia suffered from lower export revenue from palm oil, and this defeated the objectives of the Council of Palm Oil Producing Countries (CPOPC) set up last November to protect and improve the benefits of stakeholders, he said.
Positive branding
Dr Yusof said the biggest markets for Malaysian palm oil are the Asia-Pacific, sub-continent and European markets
However, in terms of market growth, the two biggest growth regions are the African and American zones. Between 2001 and 2015, exports to these two regions increased from 382,186 tonnes and 288,000 tonnes to 2.01 million tonnes and 800,000 tonnes respectively (an increasea of 351% and 299%).
He attributed the strong performance to the industry’s continuous efforts in marketing Malaysian palm oil while, at the same time, countering anti-palm oil campaigns through factual evidence and engagement with stakeholders.
“Positive branding of palm oil is the way forward to enhance acceptance of Malaysian palm oil,” said Dr Yusof, adding that an integrated advertising and education campaign launched by MPOC in Europe last year had produced good results.
He said many people had seen the MPOC’s initiative as good and this was going to change the negative perception of palm oil. “Through branding and advertising, we should be able to access markets to appreciate Malaysian palm oil.”
Dr Yusof said to ensure that the Malaysian oil palm industry was sustainable, the production of sustainable palm oil was a necessity.
“Malaysia needs country-level commitment to support 100% (mandatory) sustainable palm oil. This can be achieved under RSPO, MSPO or their equivalent.”
He said that currently only 20% of Malaysian palm oil produced was certified under RSPO (Roundtable on Sustainable Palm Oil) and less than 2% certified under the Malaysian Sustainable Palm Oil (MSPO) standard scheme. He anticipates that by 2020, 30% of Malaysian palm oil production would be certified (20% RSPO + 10% MSPO).
“Branding Malaysian palm oil may not be possible if it is not backed by mandatory certification claims. If there is still a two-tier market, the smallholders will be the biggest loser, ” he added.
Review tax structure
In her paper Domestic Measures To Enhance Competitiveness Of The Palm Oil Industry, Malaysian Palm Oil Board (MPOB) director-general Datuk Dr Choo Yuen May urged Malaysia to re-look its palm oil export tax structure in the wake of Indonesia’s new export levy which would adversely impact Malaysian palm oil export competitiveness.
She said Indonesia has widened the gap between CPO and refined palm oil export taxes to encourage more downstream investments and production of refined palm products.
As the CPO and crude palm kernel oil (CPKO) were relatively cheaper for downstream activities in Indonesia, this has increased the competitiveness of its domestic downstream sector, she said.
“Malaysia and Indonesia compete in the same market, hence the change in export tax rate in one country will affect the other,” said Dr Choo, adding that MPOB and the Plantation Industries and Commodities Ministry were working on short-term measures to ensure the Malaysian downstream sector remains competitive.
Dr Choo said that as a measure to reduce palm oil stocks and push up palm oil price, the Government launched a RM100mil stabilisation fund last October as incentives for replanting oil palm, targeted at 83,000ha last year.
Under the National Key Economic Area (NKEA), the palm oil focus towards 2020 is to accelerate replanting and new planting of oil palm, increase independent smallholders’ income by 30% through increase in yield.
She said the palm oil entry point projects include accelerating replanting, improve fresh fruit bunch yield, improving workers’ productivity in plantations and estates, increasing oil extraction rate, developing biogas facilities at palm oil mills, developing oleo-derivatives and expediting growth of food and health-based downstream segments.
Thestar.com.my
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