RI CPO competitiveness under threat - The Jakarta Post

26/05/2009 (The Jakarta Post) - Despite Indonesia being the world’s largest producer of crude palm oil (CPO), its competitiveness in overseas markets is being eroded due in part to burdensome levies – both by central and local governments – and to poor infrastructure.

Indonesia exports around 70 percent of its annual CPO production, but the commodity’s exports could be hit by weakening competitiveness, according to the Indonesian Palm Oil Association (Gapki).

Gapki chairman Susanto said last Friday that many local administrations imposed levies which
overlapped with other levies and taxes laid down by central government.

“We do not mind extra levies from regions. Some of them are in fact reasonable, but many others simply do not make sense. In addition to poor infrastructure, in particular the ports to handle CPO shipments, the burdensome levies are eroding our competitiveness,” Susanto said in a discussion with The Jakarta Post.

The levies are additional to other taxes, such as income tax, which are also applied more generally to other non-palm oil firms by the central government.

Susanto pointed to one example of local governments requiring companies in the sector to pay a non-PLN (state utility company) electricity fee, although CPO firms normally generate their own electricity from their own power stations and distribute excess power to neighboring communities.

There are also regencies requiring the palm oil companies to be responsible of the use of public roads by paying “special road tax” or requiring them alternatively to build their own roads and not to use existing public roads. Some also apply taxes based on the size of the palm oil plantations, to optimize local government revenue from larger plantations.

On infrastructure, Indonesia has too few port facilities designed to handle large CPO shipments, sometimes resulting in overcapacity and congestion in existing ones. Susanto gave the example that in Belawan and Dumai ports, two of the largest ports for the commodity, the congestion is such that this often leads to delays of up to four days to secure shipping clearance.

Joko Supriyono, GAPKI general-secretary, echoed these sentiments.

“This is not to mention the overlapping of concessions between the palm oil plantations and mining projects in the same areas, although the palm oil concessions had already been approved previously,” he said.

Joko said other factors potentially weakening the competitiveness of Indonesian palm oil included low productivity per hectare, as Indonesia was only able to produce an average of 2.5 tons of CPO per hectare, only about a third of the average Malaysian output.

In addition unfair campaigns against the industry by international environmental activists had a negative impact, alongside the fact that many Indonesian companies did not yet have RSPO (Roundtable on Sustainable Palm Oil) certificates required for exports, which were the result of joint action internationally by some (mostly) larger producers, NGOs and other stakeholders.

Moreover, the government may now re-impose a 3 percent tax on palm oil exports next month, as the price of CPO, which had previously bottomed out after a major decline, has now significantly risen again.

Susanto pointed out that the increasing price of palm oil on the international market has not necessarily raised the margins of the palm oil firms as they are subject to a variable export tax, which depended on the movement of international base prices.

As the prices on the international market have averaged US$773.1 a ton during the last 20 days this month, the government will likely increase the base price for taxing exports to $700 a ton from $560 a ton.

The government tries to adapt its base base price for tax purposes according to international market trends, but the industry felt this mechanism was clumsy and could lead to negative impacts of volatile price fluctuations on company sales and prices.

The central government export tax regulation is aimed at securing the supply of palm oil for cooking oil industries and at keeping cooking oil prices stable. This is an important social priority for government, illustrating the problem, experienced also in other export industries, of how to balance domestic demand with export demand, especially for a food product with major social policy ramifications.

“I think to secure the stability of the cooking oil price on the local market, the government should do it by providing a form of subsidy and not by slapping on export taxes every time prices increase on the international market,” Susanto said.

CPO price jump spurs complaints about speculation - The Star Online

18/05/2009 (The Star Online) - TOGETHER with a recovery in global commodity prices, crude palm oil (CPO) futures for three-month delivery shot up to above RM2,600 a tonne at Friday’s market closing from RM2,000 on March 31.

The jump in CPO prices has prompted some to complain about speculation in the market, while Bursa Malaysia said speculators played an important role in the market and that prices reflected true supply and demand.

“High prices will hurt consumers, and cakes, detergents and other products will be more expensive. We are not against a high margin for producers but prices have to go up slowly,” a trader told StarBiz.

He pointed out that from March 31 to April 29, the CPO three-month futures jumped more than RM400 a tonne on not very high volume, which he said meant speculation.

Bursa chief market operations officer Devanesan Evanson responded that based on its analysis, the recent price changes were due to sustained interest by the market in ringgit-denominated CPO futures (FCPO) and were in tandem with the movement in prices of other edible oils and crude oil.

There were also fears that the current high price of above RM2,600 was creating risks for smallholders, because if prices were to fall to RM2,100 or RM2,200, large CPO importers like China and India would begin to default.

“We are not in a position to comment on the risk of default by importers like China and India in the underlying physical CPO markets. However, in the futures market, investors are able to hedge the price risk of the underlying physical CPO market,” Devanesan said.

He also explained the importance of speculative buyers in the market.

“Speculative buyers and sellers create the vibrancy of a market. For a futures market to succeed, it is imperative that there are both speculators and hedgers.

“Purely long and short hedgers may not be sufficient to create a liquid CPO futures market. The participation of speculators willing to take the risk on the other side of hedgers adds liquidity and thus makes it easier for hedgers to hedge,” he said.

However, with the highest daily volume for the CPO three-month futures of 20,000 lots traded in the past 12 months, some do not consider it high enough.

Should there be higher volume in the futures market to reflect the real price based on supply and demand?

“The FCPO in April 2009 recorded an all-time high of 442,220 contracts with a daily average of 20,101 contracts traded. The year-to-date May 12, 2009 trading volume was 1,420,139 contracts,’’ Devanesan said.

“We believe the prices reflect the existing supply and demand. Nevertheless, market liquidity can always be improved with participation from more investor types in the CPO futures,” he said.

In an effort to boost trading volumes, Bursa has introduced Direct Market Access (DMA) to facilitate trading access by overseas participants. DMA contributed approximately 7% of market trades in the first quarter of 2009.

Bursa’s futures brokers have also started introducing routing of trades from overseas and Internet trading to increase retail participation. “This will increase access to the market and hence improve the profile of our CPO futures among local and foreign investors,” Devanesan said.

Unusual market activity queries are issued when share prices shoot up without market leads, and the trader that spoke to StarBiz said that there should be a similar system for commodity futures.

Devanesan responded that Bursa conducted queries on unusual price movements on futures broker representatives or trading participants if the situation warranted such a need.

“Investors are aware that trading in FCPO is subject to price limits of 10% from the previous day’s settlement price. If this price limit is triggered, either by price falling or rising significantly, then trading will be conducted within the price limit for 10 minutes.

“After which, the market will be halted as a ‘circuit breaker’ for five minutes. Trading will then resume with the price limit increased to 15%,” he explained.

Late last month, the economic crisis prompted the Organisation of Petroleum Exporting Countries (Opec) and 13 Asian countries meeting in Tokyo to urge for greater oversight of oil and other commodity markets to prevent a surge in prices after the global economy recovered.

However, Devanesan said this question was related to crude oil and even though Malaysia is one of the 13 Asian countries, there was no relevance to palm oil.

“The statement is more in reference to crude oil and the ‘calls for greater oversight of oil and other commodity markets to prevent a surge in prices’ by imposing position limits, reviewing over-the-counter trading, etc,” he said.

Safeguards to manage speculation appear to be in place at Bursa.

All traders were subject to position limits for trading in the FCPO to ensure that speculative trading was conducted in a fair and orderly manner, he said.

“The exchange does not attempt to influence prices as that is purely a function of the market, where trading activities are usually affected by economic indicators, changes to government policies (e.g. palm oil import duties imposed by other countries), as well as trading indicators such as prices of other correlated commodities like crude oil and soyoil,” he added.