Business

Tuesday January 8, 2013

China’s tighter rules may hurt palm oil industry

COMMODITIES TALK
By HANIM ADNAN


STILL fresh from the aftermath of Indonesia's lower palm oil export duty regime, local refiners are now faced with a new challenge China's Inspection and Quarantine Bureau's (CIQ) tighter requirements on imported edible oils, including refined palm oil, to be of “landed quality” rather than the preceding “shipped quality at origin” introduced early this month.

If local refined bleached deodorised (RBD) palm olein exports were restricted or constricted into China, the world's second-largest palm oil importer, then what are the options for Malaysia to redirect its 300,000 tonnes of palm oil imported into China monthly?

It is understood that palm oil that does not meet specifications would be turned away and no longer be allowed to be re-refined in China. The CIQ regulation also holds the refiners and exporters responsible for the deterioration of the edible oils without additional charges.

Given the current volatility in the commodity market, this could also lead to abuse and default by the importers.

The Palm Oil Refiners Association of Malaysia (Poram), for instance, is most concerned that its members may face big losses if their cargos are rejected. It opined that China's restriction could also open the floodgates for other major importing countries to demand similar treatment for palm oil imports.

This exposes the exporters, who are typically the refiners and traders, to the risk of rejection, as they have no control over the deterioration in quality of shipments once loaded onto the vessels.

While the Malaysian Palm Oil Board (MPOB) has said that only about 5% of local palm oil shipments to China did not meet the new CIQ specifications based on information from the Chinese authorities, market analysts, however, are of the view that this could impact as much as 175,000 tonnes of palm oil exported from Malaysia.

Based on a back-of-the envelope calculation, if left unchecked, the impact of the CIQ rules would see domestic palm oil stocks potentially rising by about 7% in 2013 from the historic record palm oil stocks of 2.56 million tonnes last November.

For every 5% reduction in annual palm oil exports to China, market analysts have projected that domestic palm oil stocks could be elevated by 175,000 tonnes.

If this happens, the tougher measures imposed by China could slow down demand for refined palm oil and trigger weaker crude palm oil (CPO) prices in the short term, as the industry tries to adjust to the new requirements.

On the flip side, despite expectations that refined palm oil exports would be retricted into China, some quarters are quite optimistic that local CPO exports that were not affected by the new ruling would start to increase.

Therefore, Malaysia's timely changes in its CPO export tax structure, which stood at zero export duty this January, could prove to be beneficial to the local industry.

This would help Malaysia in dealing with its current record high palm oil stock to a more stable position of below two million tonnes by March this year, said market experts.

Deputy news editor Hanim Adnan is most interested to know the end-December palm oil statistics to be released by MPOB by this Thursday.

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