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.