Govt bans palm oil export to boost domestic supply

Govt bans palm oil export to boost domestic supply

SINGAPORE (Reuters): Indonesia has banned palm oil exports in the first quarter of 1998 in a bid to boost domestic supplies and keep prices under control, a move that would benefit top producer Malaysia, trade sources said yesterday.

They said the surprise decision would also force many players to declare force majeure on export contracts or fulfill them with Malaysian palm oil, keeping prices there firm in the near term.

Indonesia is the world's second largest crude palm oil producer after Malaysia. Crude palm oil is used to produce cooking oil, margarine and cosmetics, among other things.

"The Indonesian government is really furious with producers for not supplying enough palm oil into the local market," said one senior trader in Jakarta. "The ban is an indication of how angry the government is with the producers."

Trade sources said that in a letter marked "Very Urgent", the Industry and Trade Ministry ordered producers to supply all their crude palm oil and palm olein to the domestic market from January to March.

The letter, received by the producers on Friday, stated that domestic consumption usually increased during these months because of New Year and Idul Fitri celebrations.

Presidential elections are also scheduled for March, with President Soeharto likely to seek a seventh five-year term in office.

The letter said the export ban would be reviewed if the situation in the local market improved. Producers have been given until Jan 19 to submit to the government their plans for supplying crude palm oil and palm olein to the local market.

Traders said the export ban would result in exporters who have free-on-board contracts for Indonesian-origin palm oil to declare force majeure.

"I think they will have a good case when they declare force majeure," one trader said. "But for those with CIF (cargo, insurance and freight) contracts, it will be difficult.

"This is because the CIF contract is usually Indonesia or Malaysian origin palm oil. Which means they can still buy the oil from Malaysia and ship it out," the trader added.

"Malaysian prices are already going through the roof and will only go higher if we see players rushing to Malaysia to buy palm oil," he said.

Traders also said exporters might also seek to delay export shipments until February or March because of the possible government review of the export ban.

In Kuala Lumpur, Malaysian palm oil futures prices surged in early trading on Monday on news that Indonesia was banning crude palm oil exports in the first quarter of 1998.

At 0348 GMT, the benchmark March futures contract was up 39 ringgit at 2,086 ringgit per ton. The contract had opened earlier on Monday at 2,060 ringgit, up 13 from last Friday's close.