Indonesia upbeat on KL palm oil pact

Indonesia upbeat on KL palm oil pact

KUALA LUMPUR (Reuters): An Indonesian palm oil industry leader ruled out on Thursday talk that an accord between Malaysia and close rival Indonesia to prop up palm oil prices could fall apart.

Malaysia and Indonesia, the world's top two palm oil producers, agreed last month to form a working group that could be turned into a global palm oil producers' group.

They also plan to lobby for better market access in China and India.

"I am sure (the pact) will go on well because the two sides have shown a strong motivation," Derom Bangun, chairman of the Indonesian Palm Oil Association (Gapki), said in an interview.

"(They) already have more understanding that the competition is not between (producing) countries, but between various vegetable oils," he said on the sidelines of an edible oils outlook conference in Malaysia's capital.

But traders said the pact will never materialize because both countries are closely competing in a glutted market. Prices of the edible oil are currently at 10-year lows.

They said India's move to hike import duties on edible oils to 75 percent could force Malaysian and Indonesian exporters to cut prices to compete in India.

India was Malaysia's top palm oil buyer in 2000, taking 2.03 million tons. It is also one of Indonesia's main buyers.

Traders also said India was likely to shift to soyoil, whose duty stands at 45 percent, at the expense of palm oil. Soyoil is the direct competitor to palm oil.

But Bangun said Malaysia and Indonesia should look for new markets such as the former Soviet Union while retaining the key Chinese and Indian markets.

"The two countries can jointly promote the use of palm oil in ...countries which haven't been using (it), let's say the former Soviet Union. We should find new markets," he said.

"India will keep using some. It's impossible for them to only use soybean oil," Bangun said, without elaborating.

Plantation analysts said Malaysia's crude palm oil production could rise to 11.2-11.6 million tons this year from 10.84 million in 2000. Indonesia's output could rise to 7.5-8.0 million tons this year from 6.5 million last year.

Consumption in Malaysia is flat at up to two million tons, which means the country needs to export much of its output. Consumption in Indonesia is at around 3.7 million tons, according to analysts and traders.

Bangun said Indonesia supported Malaysia's plan to fell aging palm oil trees covering 200,000 hectares. The move could reduce palm oil supply by 600,000 tons.

Bangun said Indonesia's palm oil expansion has slowed in recent years as the country struggles to overcome its worst economic crisis in decades.

He said there were virtually no new palm oil areas in 2000. This compares with an 11.8 percent growth in plantation hectarage in 1997, 10.5 percent in 1998 and 6.4 percent in 1999.

"There were so many problems in 2000. It was not only financial (problems), but mostly social problems which made it very difficult to secure the ownership of land," he said.

Traders said looting was rampant in plantation areas during the crisis, which discouraged foreign investments.

Meanwhile, in Kuala Lumpur, the benchmark third-month May contract ended up two ringgit at 818 ringgit ($215.26) a ton after trading as high as 836.

Physical March (south and central) crude palm oil was offered at 790 ringgit a ton against bids at 780. It traded at 770 to 775.

April (south and central) was offered at 820 ringgit against bids at 810 and trade at 800 to 805.