A turf war has once again broken out between Indonesia and Malaysia, two of the world’s top palm oil producers, to retain market share in the lucrative export business. The latest in the series of trade wrangles is the recent Malaysian announcement that it will do away with export duty on crude palm oil (CPO) for September and October. The rate of export duty is 4.5 per cent.

For Malaysia, the move has become necessary to help it cope up with rising inventory and falling market prices of palm oil. It may extend the tariff concession till December, if the situation warrants.

Futures stay low

Currently, on the Bursa Malaysia Derivatives Exchange crude palm oil futures have fallen below 2,100 Malaysian ringgit a tonne (MYR/t) and are testing a multi-year low of 2,000 MYR/t. In dollar terms, prices are slightly lower than $700/t. A 20 per cent decline in prices over the last 3-4 months has been triggered by a combination of supply-side developments. This includes an anticipated glut of oilseeds (soyabean and rapeseed ready for harvest) in the northern hemisphere as well as rising palm oil supplies during the ongoing peak production season, that began in in April and extends till October.

To be sure, Indonesian crude palm oil is available $40-50 a tonne cheaper than Malaysian produce. Malaysia has been strenuously attempting to export refined palm oil and other value-added products; but large refining capacities built in major import markets such as India have favoured import of crude palm oil over refined oil. Also, India imposes a customs duty of 7.5 per cent on import of refined oils.

India favours less-expensive Indonesian origin crude palm oil. Finding its market share under pressure from its trade rival, Malaysia has succumbed to market forces and has eliminated export duty. But this may not be the end of the story. Indonesia is sure to retaliate with competitive reduction in its export tax to retain own market share. Such competition is good for major importing countries such as India and China.

Large stockpiles

An additional factor for price pressure is the rising inventory. The inverse correlation between Malaysian stocks and palm oil prices is well established. Although an official figure is yet to emerge, there is widespread belief in trade circles that the inventory would be closer to 2 million tonnes by August-end compared with 1.7 million tonnes by July-end. Stocks may rise even further in September and October.

Going forward, palm oil prices are expected to remain weak. For the year 2014-15, the world vegetable oil market is set to be in a state of surplus with demand growth trailing supply growth.

Many analysts who wagered on the possibility of El Nino impacting palm oil production have once again been proved wrong. According to USDA, production of major vegetable oils in 2014-15 will be 175 million tonnes, 6 million tonnes more than in the previous year. Demand growth may trail at around 4 million tonnes.

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