Business

Tuesday October 18, 2011

Urgent need for Govt to help hard-pressed palm oil players

Commodities Talk- by Hanim Adnan


SINCE early this year, there have been many SOS calls seeking the Government to address the adverse impact of Indonesia's palm oil export duty structure on export competitiveness of local palm oil downstream industries.

The situation is now turning from bad to worse with Indonesia's latest move to slash by over 50% of its palm oil products export duty effective last month.

The bigger picture is that the lower export duty will make the Indonesian palm oil bulk products significantly cheaper than those from Malaysia. Indonesia's policy to expand its downstream palm products is seen by many as a strategy to build the sector at the expense of the upstream plantation sector.

Many also see the upstream plantation industry, including Malaysian plantation companies with operations in Indonesia, ultimately helping to subsidise the expansion of the republic's downstream industry.

Obviously, this is a wise move because Indonesia has become the world's largest producer of palm oil since 2007 and there is a need to create more market players domestically to absorb the high CPO production.

Similarly, the Indonesian government is pushing for a rapid expansion in its oleochemicals and biodiesel sector.

For the local downstream players, if the palm oil export duty differential is still not corrected and/or neutralised, the Malaysian palm oil downstream industry will not be competitive in future.

The Government perhaps should consider some of the strategic recommendations to improve export competitiveness of the local downstream sector.

The recommendations include: following the Indonesian duty structure, conducting government-to-government dialogue requesting Indonesia to re-look its export duty structure and also, to consider providing export incentives to Malaysian palm oil downstream industries.

Currently, the Government is believed to be only in the midst of considering to appoint a consultant to look at all options available.

It is important to note that the situation in the palm oil downstream sector has changed tremendously, especially with Malaysia no longer the largest producer and exporter of CPO, which in turn is the main feedstock for the downstream sector.

While local players have acknowledged that Indonesia has progressed much in terms of production and marketing, all still boils down to the cost of production.

Obviously the local palm oil downstream players are not asking the Government to make them profitable, rather it is to ensure a level playing field so that players can make decent margins.

As it is, local players are already handicapped by higher raw material costs, hence how will they be able to compete with the cheaper Indonesian palm oil goods?

There is thus an urgent need for a new policy or incentive by the Government to make the playing field level again. Furthermore, with almost 70% of the Malaysian palm oil market now at stake, the Government needs to act fast to save the RM60bil industry.

  • Deputy news editor Hanim Adnan thinks it is most timely for the Government to review the domestic CPO export duty, which has been unchanged since the 1970s.

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