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| A worker carries palm fruits at a palm oil plantation in Talun Kenas, North Sumatra. Indonesia is the world's largest producer of palm oil, with 25.4 million tons produced in 2011, followed by Malaysia with 18.7 million tons. The two countries account for 80 percent of global output, and are followed by Thailand. (EPA Photo/Dedi Sahputra) |
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Jakarta/Kuala
Lumpur. 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 $2.5 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 neighboring 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
$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 $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 $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 POL-MYRBD-M1 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 $40 per tonne from $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 $9 to $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 1 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
capitalize 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 $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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