Palm oil export ban: Light at end of the tunnel?

Palm oil export ban: Light at end of the tunnel?

LONDON (Reuters): Reports coming out of Indonesia yesterday morning seemed to give the European vegetable oil market hope of light at the end of the tunnel, or is there?

"There is light, but it's only a candle and that can soon be blown out," said one trader.

According to newspaper reports, Indonesia will keep the ban on exports of crude palm oil and olein until cooking oil is affordable at the price of 3,000 rupiah per kilo in the domestic market.

Indonesian traders said the price to consumers was currently a little above 3,000 rupiah.

The Director General of Agricultural and Forestry Industries at the Ministry of Industry and Trade, Sujata, was quoted as saying in Jakarta the government does not plan to lift the embargo until supplies of crude palm oil and olein were sufficient to lower the price of cooking oil to 3,000 rupiah per kilo.

He said the government was determined to lower the price of cooking oil in the domestic market and it was likely the 3,000 rupiah per kilo target can be reached in the not-to-distant future.

This coupled with Tuesday's news of a temporary lifting of the ban on palmkernel oil and palm stearin exports until March 14 has been the first good news the market has had for some time and prices reacted accordingly.

However, in the cold light of day the market's problems seem far from over.

"For a start no one is kidding themselves that the ban is going to be lifted before the elections in early March. Even if the ban was lifted, say on April 1, it could be sometime before palm oil is being shipped again," said one trader.

Traders said it is very unlikely that vessels will have been left standing idle, waiting for the ban to end.

"The first thing will be to get ships into position and then there is the Federation of Oils Seeds, and Fats Associations (FOSFA International) rules on the last usage of a ship," said another trader.

Under the FOSFA rules there are server restrictions on what the vessels have carried for the last three voyages.

For example a vessel cannot have carried petrol during the last three trips.

"The master must be able to prove that the vessel has been thoroughly cleaned, tanks, pumps, heating coils, everything that the palm oil will come into contact with," said another trader.

"Also the tank must be completely dry, no puddles of water in them," he added.

Traders said although there will be some kind of warning that vessels are wanted, it will depend where the ships are and what they have carried as to how quickly they can be bought into use.

"You cannot send any old ship to get palm oil these days and if they have been chartered for other work people are going to have to wait for them to become available," said one trader.

But the problems don't stop at the availability of shipping.

"There is also the question of how the palm oil has been stored," said a trader.

"People will want to known if the crude palm oil has been kept in tanks that have been previously used for palmkernel oil, which can effect the quality," the trader added.

Another problem could be the Free Fatty Acid (FFA) levels which rise the longer the oil is stored and once they have past five percent the oil becomes unmarketable.

"It can be sold as palm fatty acid, but there is not a great demand for that," said one trader.

Traders said the palm oil can be stored for up to six weeks or maybe longer, but it would depend on the condition of the tanks and how well maintained they are.

"It seems the tanks are full, which is why they are allowing exports of palmkernel oil and stearin, so what is happening to the fruit that cannot be harvested? Is it just being left to rot. If it is that is a lot of dollars the Indonesian's are going to lose" said a trader.

According to the latest reports Indonesia has national crude palm oil stocks of 157,000 tonnes and olein stocks of 64,000 tonnes.

Traders estimate that Indonesia produces around 500,000 tons of crude palm oil a month of which it uses 300,000 to 350,000 tons on the local market.

Even when the ban is lifted and shipping problems have settled down there could be further problems.

"I feel sure we will see a double drop in the price of palm oil on the international market once the taps are turned back on," said one trader.

A few buyers have been switching to soft oils as a replacement for palm oil, and Chicago soy oil futures have seen some increases as a result of the ban.

Traders said once the ban is lifted the price of palm and soft oils will fall, but then they expected palm oil prices to fall again as sellers try to win back markets lost to soft oils as a result of the ban.

"I think we are going to be feeling the shock waves of this ban for sometime to come and who at the end of the day is going to trust Indonesia as a supplier," said a trader.