Crunch Time for CPO Producers

KUALA LUMPUR: Competition from Indonesia in the palm oil sector is set to heighten with the loss of Malaysia’s Generalised Scheme of Preferences (GSP) status in the European Union from January 2014, a measure that will lead to higher taxes on palm oil exports.

The existing GSP offers developing countries duty reductions of up to 66%. But the EU has removed Malaysia from its list as the country is now deemed an upper middle income nation according to The World Bank.

Kuala Lumpur Kepong Bhd (KLK) CEO Tan Sri Lee Oi Hian said some Malaysian oleochemicals entering the EU will be taxed between 4% and 6% without the GSP.
“This is a very big problem for us because Indonesia is still considered a developing country,” he said, which implies that Indonesia’s exports to the EU will be tax exempted.

“We will just not be competitive,” Lee said at a Global Malaysia Series workshop last Friday on Fuelling the Economy — The Business of Palm Oil.

He said Malaysia was already put in a very uncompetitive position when Indonesia restructured its export tax system on palm oil in September 2011 to promote downstream activities.

“I would like to urge the government to put the free trade agreement (FTA) [discussions] with the EU on a faster burner and try to resolve some of these issues,” he said.

“With losing the GSP, if we don’t tackle it well, it could be another nail in the coffin for us.”

The EU does not give GSP status to nations with which it has an existing FTA, but as yet, the two countries have yet to reach an agreement. Malaysia has been in talks with the EU for an FTA since May 2010.

“From a local standpoint, of course we don’t want any duties to be imposed on our palm oil products because that is an additional cost for us to bear,” Palm Oil Refiners Association of Malaysia (Poram) CEO Mohammad Jaafar Ahmad  told The Edge Financial Daily.

In 2011, Malaysia exported 2.01 million tonnes of palm oil to the EU, according to data from the Malaysian Palm Oil Board. This is about 11% of the total volume of palm oil exported that year.

“For a long time Malaysia has believed that it is on top of the world, the leaders in plantations. Until we go to Indonesia and find that their oil extraction rates (OER) are better than ours,” Lee said during the session.

Some mills in Indonesia run an OER of 25%, but in our industry here we are very happy with 22%, he said. “We need to challenge ourselves to do better.”
The palm oil sector has also been plagued by a labour shortage along with low crude palm oil (CPO) prices and high stock levels, which all work to crimp margins.
The key to competing with Indonesia amid these hindrances, said Lee, is productivity.

The wage floor of RM900 in Peninsular Malaysia and RM800 in Sabah and Sarawak has raised some concern for employers, but Lee said he does not mind.
“Wages have to be linked to productivity, so we need productivity increases,” he said.

“For plantations the impact is minimal … because by and large most of our workers, especially harvesters, in good months are earning over RM2,000 per month because we pay them linked to productivity.”
“We are innovating for the future,” he said, adding that eventually it will become more and more difficult to hire foreign labour.

In Peninsular Malaysia, migrant workers make up to 50% or 60% of labour on plantations. In Sabah and Sarawak, almost 95% of workers are foreigners.

Exacerbating the situation is a proposal in Indonesia to further increase its existing minimum wage level, a measure that makes it even harder for local plantations to attract foreign labour. The government has approved a 18% hike on average for 2013 but it has not been implemented yet.
“In recent years there has been more and more mechanisation,” Lee said.

Harvesting tools have been known to increase productivity by about 30%. Because of this, locals don’t seem to mind being involved in harvesting because the work has become less strenuous while the pay is higher.

“There will not be a single magic bullet, but innovation upon innovation will add up to much more productivity. If our locals can earn more, I don’t see why they wouldn’t want to work in plantations,” Lee said.

On the sector’s pricing and stock level woes, he said, “CPO prices are supported by the 30% discount it currently trades to soyoil.”

At last Friday’s close, the three-month futures contract stood at RM2,417 per tonne, remaining flat.

“The best solution for high stock levels is low prices. Eventually, it will be digested,” Lee said. In fact, as at February, stock levels had declined by 5.23% to 2.44 million tonnes against 2.58 million tonnes in January.

Source : The Edge

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