Malaysia needs consistent downstreaming policy
In 2014, India emerged as Malaysia’s biggest buyer when it ordered 2.87 million tonnes of palm oil in the first 11 months. This worked out to be 35 per cent more than 2.12 million tonnes posted in the same period in 2013. This is good news. But recently, the situation has made a U-turn.
On the 24th December 2014, India raised the import duty on crude palm oil (CPO) from 2.5 per cent to 7.5 per cent. It had also increased the duty on refined palm oil to 15 per cent from 10 per cent.
In an interview with Business Times, Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad noted India’s decision was not surprising.
It was meant to protect the interest of its oilseed farmers and edible oils refiners.
“It also signals to Malaysia that they are not interested to buy that much CPO. It warrants that Malaysia should stop declaring duty-free CPO exports and let market forces dictate its own course,” he said.
Jaaffar was referring to Plantation Industries and Commodities Minister Douglas Uggah Embas’ declaration of duty-free CPO exports from September 2014 to February 2015. Such a declaration is actually redundant.
At worst, it even confuses downstream investors as to the Malaysian government’s commitment to value adding the palm oil industry.
Since September 2014, CPO prices averaged below the tax threshold of RM2,250 per tonne. Malaysia should have just let the tax structure run its course, just like what Indonesia is doing. As long as CPO is trading below RM2,250 and US$750 a tonne, respectively, there is no duty on CPO exports from Malaysia and Indonesia.
The strategy of declaring duty-free CPO exports to bring down national stockpile level in the hope of pushing up CPO prices is not so effective like before because Malaysia is no longer the world’s biggest palm oil producer.
“We need to be more discerning about this ‘silver bullet’ because the current global economic situation is very different from 10 years ago,” he said. “Adhoc declaration of duty-free CPO exports can backfire and trigger needless price war with Indonesia. CPO price war is hurtful for all oil palm planters, whether they are in Malaysia and Indonesia,” he said.
Many people think refiners and planters are at loggerheads, engaged in a zero-sum game. This is a wrong assumption because refiners are purely concerned about the price gap, and not how low the CPO price will go.
“It is a misconception that in times of falling CPO prices, refiners are happy at the expense of planters. As refiners, we are margin players. It doesn’t matter if CPO prices are high or low,” he said.
“In fact, everybody from upstream to downstream of the palm oil value chain win when CPO prices are high. That is the role of the refiners in supporting CPO price as we buy and process every drop of CPO in the country,” he added.
In the last two years, Pakistan’s purchase of palm oil from Malaysia fell significantly. Pakistan consumes about 3.2 million tons of edible oils annually and meets more than half of its demand through imports.
Jaaffar explained that since 2013, Pakistan’s free trade pact with Indonesia drew parity to palm oil shipment from Malaysia. This means Pakistan’s purchase from Indonesia and Malaysia enjoy a 15 per cent rebate on import duties of 8,000 rupees a tonne on CPO, 10,800 rupees on RBD (refined, bleached and deodorised) palm oil, 9,050 rupees on palm stearin and 9,050 rupees on RBD palm olein.
“Pakistan is a price sensitive market. Since Indonesia is able to sell RBD palm oil more competitively than RBD palm olein, Pakistan had bought more RBD palm oil at the expense of Malaysian RBD palm olein,” he said.
China, like Pakistan, had also slashed its palm oil purchase from Malaysia. In the first 11 months of 2014, China had only bought 2.58 million tonnes. This is a 23 per cent shortfall from 3.34 million tonnes in the same 11 months of 2013.
In the last five years, Jaaffar noted China’s palm oil demand had been artificially pushed as ‘financial products’ rather than ‘commodity products’. Since banks in China give peculiar treatment to palm oil, viewing it as ‘institutional instruments’, palm cooking oil and margarine demand will continue to be augmented by fiscal policy changes there.
Nevertheless, Jaaffar said the current shortfall in China’s palm oil purchase is also exacerbated by subdued consumer spending. “China is Malaysia’s best cooking oil market. In view of cautious consumer spending, we need to be more focused in market segmentation to raise popularity and branding of our oil,” he said.
Three weeks ago, Second Finance Minister Datuk Seri Ahmad Husni Hanadzlah said Prime Minister Datuk Seri Najib Razak is forming the National Export Council (NEC) to explore new ways to improve the country’s export chain, logistics and output.
Poram lauds the NEC formation and urges this high-powered decision-making body to make an iron-clad commitment to palm oil downstream players that ‘a level playing field with rivals’ is consistently maintained for the sake of Malaysia’s export competitiveness.
“The current ‘flip-flop policy change’ in exempting CPO export duties for six months from September 2014 to February 2015 is confusing foreign and local downstream investors who have already sink in billion of dollars in investments. The erosion of investor confidence is not healthy for our economy,” Jaaffar said.
He also proposed that the NEC adopts advocacy and political tools in tackling the global smear campaign on palm oil so as to boost the country’s exports. “The right (and also difficult) thing to do is to tackle barriers (be it tariff or non-tariff) to palm oil trade at its roots,” he said.
“This strategy is healthier for all stakeholders along the palm oil value chain; whether you’re a planter, a cooking oil trader or a biodiesel manufacturer. We must remember, the oil palm is Malaysia’s economic security crop,” Jaaffar said, in reference to the country’s annual US$20 billion palm oil exports which support some two million jobs and livelihoods along the sprawling value chain.
Since 1st January 2015, Malaysia assumed chairmanship of Asean. The 10-member Asean, formed in 1967, comprises Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei. Cambodia, Laos, Myanmar and Vietnam.
It is also this year, the Asean Economic Community (AEC) vision is being rolled out. With 600 million people or almost 9.0 per cent of the world population and an economic size of US$1.8 trillion, the AEC is Asia’s third largest economy.
The AEC is created for people, goods and money to move around with little or no economic barriers.
Jaaffar said it would be timely for Malaysia, Indonesia and Thailand to collectively have palm oil listed as ‘environmental goods and services’ under the Asean Trade in Goods Agreement.
“The broad objective of this suggestion is to get environmental branding for palm oil and eventual adoption at Regional Comprehensive Economic Partnerships (RCEPs), Asia Pacific Economic Cooperation (APEC), Trans-Pacific Partnership Agreement (TPPA) and other free trade pacts,” Jaaffar said.