Top palm oil producer Indonesia wants to be more refined

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 palmolein, 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
metric tonnes (47.39 million tons) 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 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 metric tonnes annually as well as supplying the combined 20
million metric tonnes of edible oil imports required by top buyers
China and India.
Indonesia's crude palm oil output - estimated
at 23 to 25 million metric 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 metric 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 metric tonnes from a year
ago, according to cargo surveyors.
Indonesian palm olein shipments jumped 55 percent in the same period to nearly 600,000 metric 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 metric tonnes shipped into
India in May.
This will make it hard for India to preserve its processing capacity of 15 million metric 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