Palm oil competitive despite higher rupiah

Palm oil competitive despite higher rupiah

KUALA LUMPUR (Dow Jones): The sharp decline in the local price
of Indonesian crude palm oil as a result of the stronger rupiah
has reduced returns to local farmers, but has ensured that
Indonesian palm oil remains competitive in the international
market, traders and industry participants say.

The rupiah's weakness has been one of the factors that enabled
Indonesian producers to sell oil cheaply in the international
market in recent months, ensuring its market share despite the
global supply glut.

But even as the rupiah rises this week, the Indonesian oil
will continue to maintain its competitive advantage vis-a-vis the
Malaysian oil, traders said.

Indonesia is the world's second largest producer and exporter
of palm oil after Malaysia and has recently posed stiff
competition to Malaysian exports because of the rupiah's
weakness.

To reflect a steady U.S.-dollar denominated export market, the
local prices for Indonesian CPO fell Thursday to Rp 2,750/kg, ex-
factory Thursday in Medan, from Rp 3,750/kg last Friday.

Cost of production in Indonesia is still low, while the
stronger rupiah may also work to the advantage of growers in the
long run by reducing the cost of imported fertilizer, analysts
said.

"Local (palm oil) prices are lower because of the rupiah, but
the international market is still firm. I think Indonesian oil is
still very cheap compared to Malaysia's," said Derom Bangun,
chairman of the Indonesian Palm Oil Producers' Association.

The rupiah rallied to its highest level since February, after
the national assembly Thursday voted in Hamzah Haz, the Muslim-
based United Development Party's head as the country's new vice
president.

Hamzah's victory lifted the Indonesian rupiah to Rp 9,775 to
the U.S. dollar, from Rp 9,960 before the result. It built on its
Monday's sharp gains when Megawati Soekarnoputri was named
Indonesia's new president by the People's Consultative Assembly,
following the ouster of Abdurrahman Wahid.

At Rp 2,750/kg, Thursday's CPO price in Medan is equivalent to
US$281/ton. Crude palm oil in Malaysia was traded at 1,130
ringgit ($297) a metric ton, ex-factory, and equivalent to
US$300/ton.

Derom said the local Indonesian price included a value-added
tax of around 10 percent, which Indonesian exporters aren't
required to pay.

Subtracting the tax out of the price, the actual cost price to
an Indonesian refiner and exporter to be around US$253/ton, some
US$47/ton cheaper than the Malaysian oil.

The export price in the international market is steady
Thursday. Spot shipments of RBD palm olein Thursday were at
US$342.50/ton, free-on-board Malaysian ports and US$340.65/ton,
FOB Java.

Indonesia has a natural competitive advantage over Malaysia
because of the substantially lower cost of production there, says
John K. Kuruvilla, executive director of Agro Hope Bhd., which
owns plantations in Malaysia and Indonesia.

Plantations also stand to gain from a stronger rupiah because
most of the fertilizer is currently imported.

A stronger rupiah would bring down the cost of operations
further because the lower import costs would neutralize the
adverse impact of lower returns in local currency terms from the
sale of oil, Kuruvilla said.