RI palm oil tax cut set to press prices lower

RI palm oil tax cut set to press prices lower

SINGAPORE (Dow Jones): Indonesia finally cut the export tax on
palm oil Monday, in a move which is set to pressure prices lower
in a market already awash with supply in the face of anemic
demand, according to industry experts.

The move comes after several months of lofty export taxes,
intended to curb rising domestic cooking oil prices in Indonesia,
which caused a huge build-up in inventories as producers and
refiners awaited the opportunity to sell into the world market.

The key export tax on crude palm oil has been cut to 40
percent from 60 percent, while the tax on refined, bleached,
deodorized palm oil and RBD palm olein has been reduced to 32
percent from 55 percent.

The impact on prices has already been felt, although analysts
say the true impact won't be seen until Indonesia abolishes the
tax altogether. The spot February CPO futures contract on the
Commodity and Monetary Exchange of Malaysia slumped 612 ringgit a
metric ton to close at 1,930 ringgit a ton Friday from a week
earlier, its lowest closing price since December 1997.

In the world market, spot offer prices for processed palm
olein have fallen 8.4 percent to $595 a ton Friday from $650 a
ton at the start of the year.

Palm oil trading was slow Monday due to a public holiday in
Malaysia, the world's largest producer.

"Indonesia is overloaded with oil," said a Jakarta-based
trader with a major Indonesian palm oil trading company. "All my
tanks are full. I have been looking for tank space, and I just
can't get that."

Indonesia's crude palm oil production for marketing year 1998-
99 is forecast at 5.7 million tons, up from 5.0 million tons in
1997-98, according to the U.S. Department of Agriculture. Of the
5.0 million tons, total domestic use for 1998-99 is estimated at
2.9 million tons. The marketing year runs from October to
September.

However, one industry official countered that prices in the
domestic market will remain marginally more attractive than in
the overseas market, unless the rupiah weakens.

At the current exchange rate of Rp 9,000 to the dollar, the
cut in export tax "would not boost export trade too much," said
Tarmidzi Rangkuti, vice-chairman of the Federation of Indonesian
Vegetable Oils and Fats Associations.

The Indonesian palm oil sector is, by all accounts,
extraordinarily profitable, said a Jakarta-based economist and
trade advisor. The cost of CPO production, on an ex-mill basis,
in Indonesia is about $182 a ton, while CPO is sold as much as
$585 a ton in the world market.

Profitable as it might be, the steep export tax has
discouraged exports. To date, the 60 percent tax paid by
exporters, which is included in a government-imposed fixed export
price of $535 a ton for crude palm oil, has effectively
eliminated any incentive to sell abroad. It has meant that, at
the current price, exporters earned only $32 for every ton sold
overseas instead of a possible $400 a ton had there been no
export tax.

Under the new 40 percent tax, exporters stand to make $139 a
ton. The government's fixed price, meanwhile, is due to be
revised effective Feb. 8.

Some market watchers and economists said the priority on palm
oil shouldn't be on consumers because average household budget
for cooking oil is less than 5 percent, compared with another
essential food item, rice, which takes up as much as 50 percent
of household expenditure.

"They should contain rice prices, which are on par with world
levels," said H.S. Dillon, executive director of Jakarta's Center
for Agricultural Policy Studies. Dillon is a former official with
the Indonesian Ministry of Agriculture.

Some commentators say the government should scrap the tax
altogether. Theoretically, it's supposed to progressively reduce
the tax to around 10 percent by the end of the year in accordance
with the country's agreement with the International Monetary
Fund, although many analysts feel pending elections in Indonesia
will stop the current government from making too many more policy
moves.

"The export tax is the wrong policy for Indonesia," said Pande
Silalahi, head of economics at Center for Strategic and
International Studies in Jakarta.

However, the fact that the government lowered the export tax
on cooking oil, or RBD palm olein, to 32 percent from 55 percent
-- eight percentage points lower than the crude palm oil tax --
could create some instability in the domestic market, producers
say. Previously the differential was only five percentage points.

Following are Indonesia's new export tax rates for crude and
processed palm and coconut oils effective Feb. 1:

Products New Rate Old Rate

(%) (%)

Crude palm oil 40 60

RBD palm oil 32 55

Crude palm olein 40 65

RDB palm olein 32 55

Crude palm stearin 20 25

RBD stearin 10 20

Crude palm kernel oil 30 50

RBD palm kernel oil 20 45

Crude coconut oil 15 20

RBD coconut 10 15

Notes:

CPO = Crude palm oil

RBD = Refined, bleached and deodorized