Vajpayee's KL visit may not bring palm oil deal

Vajpayee's KL visit may not bring palm oil deal

KUALA LUMPUR (Reuters): This month's visit by Indian Prime Minister Atal Behari Vajpayee is unlikely to answer Malaysia's prayer that the world's largest edible oil consumer buys more palm oil in exchange for a $1.8 billion railway project, traders said on Friday.

Malaysia, the world's largest palm oil producer, has offered New Delhi a contract involving the dual tracking and electrification railway lines from Ipoh city to Padang Besar in Peninsular Malaysia, hoping India would buy more palm oil.

Vajpayee is expected to sign the agreement during a visit scheduled to start on May 14 through 16.

"Do you expect India to change its buying pattern overnight only because of the visit? I don't see a reason why the market should get excited about the trip," said one trader in Kuala Lumpur.

Malaysia's crude palm oil futures rose earlier this week in anticipation Vajpayee's trip would yield positive news to a market desperate for fresh leads.

The railway project offer was the latest move by Malaysia to help reduce domestic stocks, which reached a record high of 1.52 million tons last November due to poor exports and stiff competition with arch rival Indonesia.

But some players later realized there was no guarantee India, which was Malaysia's main palm oil buyer in 2000, would accept payment for the project in the form of palm oil. India purchased 2.03 million tons of Malaysian palm oil last year.

In February, India imposed its heaviest-ever import duty of 75 percent on crude palm oil and 85 percent on refined palm oil to stem imports and protect the local industry.

"This is very big money for India, which it may use for the country's infrastructure development...," said another trader.

"$1.8 billion is big money and the prime minister will be very happy to sign the agreement. But we don't know if the document will include a clause which mentions palm oil.

"Nobody in India has ever mentioned a clause about palm oil."

Malaysia and Indonesia, the world's largest palm oil producers, urged India to cut palm oil import duties to 45 percent to make it at par with soybean oil.

Both countries have agreed to join hands to promote palm oil and gain more access in giant markets such as India and China.

Traders and analysts in India said this week the country was unlikely to give in to demands from Malaysia and Indonesia for rationalizing edible oil import tariffs because of low domestic prices and the impending oilseeds season.

But they said the possibility of counter-trade could be explored during Vajpayee's visit.

Some traders in Malaysia were still optimistic.

"I am sure (Vajpayee) will talk about a palm oil deal. There will be something later but I don't think you'll be exposed to the details when doing business with India," said one trader.

In Jakarta, a senior government official said Malaysia and Indonesia will meet in June to discuss plans to harmonize palm oil export taxes and reduce price gap.

"Indonesia and Malaysia expect to impose similar export tariffs to avoid tight competition in the world's market," said Rosediana Suharto, an aide of the trade and industry minister.

Traders said Indonesian palm oil is normally sold at a $5 discount to Malaysian products.

Malaysia's palm oil futures failed to sustain the 800 ringgit level and closed lower in directionless trade after the central bank denied it would issue any statement on the ringgit peg.

Benchmark third-month July futures ended down two ringgit at 795 ringgit ($209.21) a ton after trading as high as 800 on rumors that Malaysia would re-peg the ringgit.

Palm oil traders said the government needed to ease the peg because the weakening of the Indonesian rupiah has sparked aggressive sales from the world's second largest palm oil producer after Malaysia.

In the physical sector, May crude palm oil (CPO) for the southern region was offered at 770 ringgit a ton against bids of 765. Deals were reported at 760 to 770.

May CPO for central region saw offers at 765 ringgit a ton against bids of 760 ringgit. Trade was at 760.

June CPO for the southern and central regions was offered at 790 ringgit a ton against bids of 785 and trade reported at 785 to 790 for both regions.