India to accept palmoil for rail project

India to accept palmoil for rail project

KUALA LUMPUR (Reuters): India, the world's top edible oil importer, will accept palm oil as payment from the Malaysian government to undertake a US$1.8 billion rail project in Malaysia, their officials said on Thursday.

But the news failed to move Malaysia's palm oil futures, expected to hit five-month low any time, because of poor export prospects and aggressive sales by arch rival Indonesia.

Benchmark third-month July futures ended down 10 ringgit at 760 ringgit ($200) a ton on Thursday after trading as low as 752. Volume was heavy at 2,021 lots.

"What happens if after the signing of the barter deal, soyoil prices fall further and the Indonesians become more competitive?" asked one trader in Kuala Lumpur.

"India will then have to either stop the work at the railway project or buy Malaysian palm oil and sell it at a discount at the domestic market. This means that India is making a loss in this deal," he said.

Malaysia, the worlds top palm oil producer, has offered New Delhi a contract involving the dual tracking and electrification of rail lines from northern Ipoh city to Padang Besar at the border with Thailand, hoping India will buy more palm oil.

Government officials from Malaysia and India confirmed on Thursday that New Delhi would accept palm oil as payment for the railway project, but added the payment period could last for up to five years.

Indian Prime Minister Atal Behari Vajpayee is expected to sign the contract during his visit to Malaysia next week.

"It's confirmed. The payment is in the form of palm oil, but the period of payment could be between four to five years," an official at Malaysia's primary industries ministry told Reuters by telephone.

"We've got to see the contract first, but I can confirm the payment is in the form of palm oil," he added.

An Indian official also told Reuters: "The deal is very much near culmination point. It will be announced during Vajpayee's visit next week."

Traders in Malaysia said at the current prices of $265 a ton for refined, bleached and deodorized (RBD) palm olein C&F India, the $1.8 billion project is worth more than six million tons of palm oil.

This means India will have to buy more than a million tons of palm oil each year if the payment lasts for up to five years.

"Are you sure India will take all the oil? It's big money for them. India's buying pattern will not change overnight," said another trader. "India will only buy more oil during festive season."

Malaysian palm oil market has been skeptical about the bilateral deal, first mooted during last month's New Delhi visit by Malaysian Primary Industries Minister Lim Keng Yaik.

There is also a big question on whether India would stick to acquiring palm oil from Malaysia either through barter or normal trading practices when soyoil prices become much cheaper due to duty differentials. Soyoil is a direct competitor to palm oil.

In February, India imposed its heaviest-ever import duty of 75 percent on crude palm oil (CPO) and 85 percent on refined palm oil. Import duty for soyoil stands at 45 percent because of India's commitment to the World Trade Organization (WTO).

Traders also expected Indonesia, which is selling palm oil at up to a $10 a ton discount to Malaysian oil, to further cut its export tax in reaction to the Malaysia-India deal.

Indonesia imposes three percent export tax on crude palm oil and one percent for palm olein.