Industry: Malaysia-Indonesia Palm Council Will Struggle to Buoy Prices


NOVEMBER 28, 2015

Bali. A bid by the world’s top two palm oil producers to work together to support prices is unlikely to find much success, as different domestic cost structures make coordination tough for Indonesia and Malaysia while competing for a share of the same market.

Similar efforts by the countries that account for 85 percent of the global palm oil output have failed previously, while in other industries too, like rubber, such attempts have not worked, participants at an industry conference in Bali said on Friday.

“It’s not a level playing field unless export taxes are the same, for example, and they will never synchronize that because production costs in each country is different,” said a trader from Singapore. “You also can’t control palm oil production like crude oil. The bottom line is it’s going to be difficult.”

Different opinions have already started emerging from the top palm oil exporters, with Malaysian palm oil refiners calling for a common export duty structure and the Indonesian palm oil association saying a new council of the producers would not seek to form unified taxation schemes.

The countries signed an agreement to form the Council of Palm Oil Producer Countries last Saturday with an aim to coordinate stock management plans, maintain sustainable prices and create demand through biodiesel mandates.

Crude palm oil prices have since climbed to a near three-week high of 2,369 ringgit ($556.76) per metric ton, off a six-and-a-half-year low of 1,863 ringgit in August.

But this gain may be short-lived, sources said, like it has been with rubber where attempts to manage prices in April led to a 20 percent jump in prices in the first month, after which prices plunged 30 percent to hit seven-year lows.

“We feel the council will be ineffective in preventing palm oil prices from falling because demand is expected to decline and at the same time you have lower crude oil prices,” said Lingam Supramaniam, executive director of Kuala Lumpur-based brokerage Pelindung Bestari. “Even bodies like OPEC have failed to stop the decline in crude oil prices.”

Biodiesel mandates will be the other area where coordination will be difficult for the countries, industry sources said.

Indonesia has raced ahead to boost palm oil-based biodiesel consumption locally. It introduced higher subsidies and plans to raise the bio content in diesel to 20 percent in 2016 from 15 percent now. Malaysia has yet to hike its mandate to 10 percent.

“The pressure [for the council] is on now because CPO prices are low and stocks are high, but when prices are high people forget about the whole thing,” said Mohammad Jaaffar Ahmad, chief executive of the Palm Oil Refiners Association of Malaysia. “Are we going to be honest, transparent and consistent?”