GAPKI Expects No Increase in CPO Products Export Duty in Indonesia

GAPKI (The Indonesian Palm Oil Association), or the Indonesian Palm Oil Association, does not expect the Indonesian government to increase its CPO refined products export duty any time soon after slashing it by almost half starting early last month.

Executive director Mohamad Fadhli Hasan said GAPKI understood the plight of the Malaysian palm oil downstream players and also Malaysian planters with upstream operations in Indonesia following the severe cut in the export duty making local palm products uncompetitive in the world market.

The revised export duty structure will see an overall duty reduction of 53% to 80% in bulk products among others like RBD palm olein, RBD palm stearin, RBD palm oil and RBD palm stearin (in less than 25kg pack) from Indonesia.

Fadhli told StarBiz after a recent Palm Oil Refiners' Association of Malaysia (Poram) annual forum that the CPO export duty cut was not purposely aimed at Malaysia.

"This is part of the Indonesian government's strategic transformation for its palm oil sector, given Indonesia's position as the world's largest CPO producer at about 23 million tonnes annually," he explained.

As Indonesia continues to produce more CPO, Fadhli said there was a need to create more players domestically to absorb the high CPO production via building up more downstream industry.

He admitted that there was also strong contention among the Indonesian upstream players on the CPO export duty cut.

"Many say that the Indonesian government is going to promote the value-added downstream industry at the expense of the plantation industry," Fadhli added.

The lower export duty will mean that the Indonesian upstream plantation players would have to subsidise the downstream sector to expand further.

Industry observers said the Indonesia CPO export duty cut was not aimed at Malaysia alone but a more calculated move to make Indonesian refined palm oil more competitive against European refiners.

Poram chief executive officer Mohamad Jaaffar Ahmad, meanwhile, said: "Even without the lower export duty, the Malaysian industry has been paying an average of RM300 more compared with Indonesian refiners in getting their CPO supply this year.

"When this CPO is converted into refined palm products and exported, Malaysia is already at a disadvantage of RM30 to RM40 per tonne."

With the new Indonesian export duty, the discounted margin of Indonesian refined palm oil will be much wider than Malaysia's.

On average, the expected operating profit margins for the refineries should be 5% in order to be competitive against the Indonesians.

The more than halving of Indonesia's export duty since last month will make the situation more critical and almost render Malaysian refined palm products uncompetitive against Indonesian products.

According to Malaysian Palm Oil Board (MPOB) statistics, Malaysia has lost out on sales to the tune of 261,809 tonnes worth RM1.19bil of palm oil finished products between 2008 and 2010.

This is mainly because of cheaper raw materials and lower export duty imposed by the Indonesian government for that market sector.

Malaysian and Indonesian palm oil refined products are exported to the same major markets like China, India, the European Union (EU) and Pakistan.

"It is expected that with this price advantage (lower CPO export duty), Indonesian palm oil will find a much bigger market share especially in price-sensitive countries like India, Pakistan and China."

MPOB said as at end-2010, there were a total of 51 palm oil refineries in operation with a total annual refining capacity of 22.89 million tonnes.

Jaaffar said: "As long as the Malaysian Government maintains the policy of imposing export duty for CPO, we do not foresee there will be any shutdown in capacity in the short term.

"However, the refinery will be under tremendous pressure to process CPO if our refined palm oil products are not competitive against cheaper refined Indonesian palm oil products."

Poram said that with the new export duty structure, there would be less CPO available for export from Indonesia.

"This will put some pressure on the supply of CPO for our local refiners."

He said Malaysian refiners would continue to process CPO if there was demand for refined palm oil.

However, in the longer term, if Malaysia is not able to offer competitive refined palm oil products prices on the international market, there will be a large build-up of CPO stocks.

"We may need to offload them to Indonesia or the EU. Malaysia then will once again become the number one exporter of CPO. There goes our dream to become the hub for palm oil processing in the world," he added.