Gloves on in CPO battle between Malaysia and RI

Gloves on in CPO battle between Malaysia and RI

KUALA LUMPUR (Reuters): Malaysia's rejection of Indonesia's suggestion that the two countries should withhold palm oil exports to revive prices shows they are headed for a major price war, traders said on Friday.

After months of tit-for-tat where both countries either cut or completely waived export taxes for crude palm oil (CPO) in a desperate bid for market share, Indonesia signaled a truce on Thursday.

An Indonesian trade and industry ministry official told Reuters in Jakarta that Minister Luhut Pandjaitan had initiated talks with Malaysian Primary Industries Minister Lim Keng Yaik over possible cooperation to boost prices.

The official said an export retention plan, similar to the world coffee producers' retention scheme, was among the measures discussed.

But a spokesman for the Malaysian ministry immediately denied Minister Lim had discussed a price pact with Pandjaitan. The spokesman said withholding exports was never an option for Malaysia.

"In fact, we want to export more," he told Reuters in Kuala Lumpur. "That's why we are talking to China and Russia for counter-trade."

Traders said Malaysia's quick and vigorous denial of the Indonesian statement meant a prolonged a battle was looming between the commodity's biggest producers.

"The Malaysians have become very aggressive after losing much market share to the Indonesians," one said. "They are determined to export at much lower prices now than ever to outdo the Indonesians."

Malaysia's problems began when India, now palm oil's biggest consumer, raised taxes on imported refined oils twice this year to protect its domestic oilseeds and refining industry.

Malaysia, which has ample refining capacity, has always taxed CPO exports highly to ensure enough supply for downstream use.

But India's higher taxes on refined oil dealt a sudden blow to Malaysian products such as RBD palm olein. Indonesia, which had no agenda for its CPO, saw an opportunity in its rival's misery and began boosting its raw material exports to India.

Malaysia tried to recoup market share by waiving export duty on half a million tons of CPO last month -- a trick it had resorted to in earlier years when raw material supply was heavy.

Indonesia countered by slashing taxes on CPO and refined oil.

Traders said Malaysia was slow in reacting as Indonesia had already exported 500,000 tons of CPO to India by June.

To make matters worse, some Malaysian palm oil sold to India was facing contract defaults now after the local market fell to seven-year lows this week, said dealers in Singapore.

"Which Indian importer is going to take delivery when the market has fallen to such an extent?" one dealer asked.

Malaysian RBD palm olein for October was quoted at $240 a ton at midday on Friday.

But traders said the Indonesian equivalent could be obtained at around $235 a ton, thanks to the battered rupiah as opposed to the fixed value of the ringgit. The Malaysian currency is pegged at 3.80 a unit to the dollar.

Traders said the current drop in palm oil prices may result in fresh demand from India as its domestic oils supply was entering seasonal lows. But they said New Delhi might also be considering a new round of higher taxes to further insulate its suppliers.

Traders said demand has also dropped from Pakistan and China -- two other big buyers now harvesting their own oilseeds.

"Malaysia and Indonesia have no choice but to slug it out if they want to sell their palm oil to the world," said a dealer.