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IMPACT OF INDONESIA’S NEW EXPORT TAX and
OTHER BARRIERS ON GLOBAL PALM OIL TRADE
Presentation by Tan Sri Datuk Dr. Yusof Basiron
Chief Executive Officer
MALAYSIAN PALM OIL COUNCIL (MPOC)
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Indonesia Crude And Process Palm Oil Export
Crude Processed Source : Oilword
• In October, 2011, Indonesia proposed a new export tax structure which
increase the difference between the export duty for crude and refined
palm products. The change is aimed at encouraging palm oil refining
and processing activities onshore.
INDONESIA’S CRUDE AND PROCESSED PALM OIL EXPORT
Indonesian Government’s vision Existing
CPO production to reach 40 million MT in 2020 22.2 million MT
Source : The Plantation Training Institute, Medan Campus & Oilworld
• Indonesia targets an additional 17.8 million MT of CPO by 2020. Hence, higher exports of refined palm oil is encouraged by this policy and helps to absorb the increase in future CPO production.
• Under their plasma scheme, increase in private estates oil palm cultivation will
be accompanied by the increase in smallholders cultivation. Therefore, the government’s vision to raise CPO output helps farmers to own land for oil palm cultivation and improves economic benefits for farmers.
Year Smallholders (ha)
State-owned Enterprises (ha)
Private owned (ha)
Total (ha)
2009 3,013,973 608,580 3,885,470 7,508,023
2010 3,314,663 616,575 3,893,385 7,824,623 Source : Department of Agriculture of Indonesia, 2010
NEW STRUCTURE SUPPORTS INDONESIAN GOVERNMENT’S FUTURE GOALS FOR OIL PALM INDUSTRY
• Indonesia’s refineries operated at 66.8%-69.2% of capacity between 2009-2010. The refinery capacity is stagnant as there is no incentive for refiners to expand capacity since difference in duty between CPO and refined palm oil is low in the old tax structure. This new tax structure with wider duty differences between crude and refined palm oil will encourage more refining.
2009 2010
Total Refining Capacity 15,300,000 15,300,000
Production 10,596,800 10,230,000
Utilization rate (%) 69.2% 66.80%
Refining capacity and utilization (%)
Source : Department of Industry of Indonesia, 2010
NEW TAX STRUTURE SUPPORTS MORE REFINING
BASIS : The average of CIF Rotterdam CPO price in US$ (x) of the preceding month to determine the export duty for the full next month.
PRODUCTS I II III IV V VI VII VIII IX X XI XII
CPO 0 7.5 9.0 10.5 12.0 13.5 15.0 16.5 18.0 19.5 21.0 22.5
CPKO 0 7.5 9.0 10.5 12.0 13.5 15.0 16.5 18.0 19.5 21.0 22.5
RBD Palm Olein 0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.5 13.0
RBD Palm Oil 0 0 0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
RBD Palm Stearin 0 0 0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
Margarine / Shortening
0 0 0 0 0 0 0 0 0 0 0 0
Biofuel 0 0 0 0 0 2 2 2 2 5 5 7.5
Oleochemical 0 0 0 0 0 0 0 0 0 0 0 0
The average CPO CIF Rotterdam (x) :
I = x≤$750 IV = $850<x<=$900 VII = $1000<x<=$1050 X = $1150<x<=$1200
II = $750<x<=$800 V = $900<x<=$950 VIII = $1050<x<=$1100 XI = $1200<x<=$1250
III = $800<x<=$850 VI = $950<x<=$1000 IX = $1100<x<=$1150 XII = >$1250
Source : Indonesia’s Ministry Of Decree No. 67/PMK/2010
INDONESIA’S NEW EXPORT DUTY TAX STRUCTURE
COMPARISION OF EXPORT TAX APPLIED IN CURRENT VERSUS OLD DUTY STRUCTURE FOR JAN. 2012
New Structure* (%)
Old Structure (%)
CPO 15 12.5
RBD Palm Olein 7 12.5
RBD Palm Oil 5 11
RBD Palm Stearin 5 7.5
Biofuel 2 2
Source : Indonesia’s Ministry Of Decree No. 67/PMK/2010
NEW AND OLD DUTY STRUCTURE – THE DIFFERENCE
• The minimum reference price for export tax was raised from USD700/MT to USD750/MT. Therefore, at reference price below USD750/MT, there is no export duty compared to USD700/MT previously. This will reduce the tax burden of the growers when CPO price is low.
• Traditionally, export tax is passed down to the growers which means that
when the CPO export tax is 15%, FFB producers will be paid the market rate, less 15%. Similarly, refiners will also obtain discount from CPO producers.
• The widening duty disparity between CPO and refined palm oil gives incentives for Indonesian palm oil players to increase refining activity. Under Indonesia’s market condition, millers share the discounted CPO with the refiners enabling the refiners to obtain cheaper resources (i.e. discounted by more than the tax rate imposed on processed products.). This means the refiners could export refined products at price lower than international price without compromising on profit margin.
Crude Palm Oil
The first RM 650.00 per tonne Nil
The next RM 50.00 per tonne 10%
The next RM 50.00 per tonne 15%
The next RM 50.00 per tonne 20%
The next RM 50.00 per tonne 25%
The balance 30%
• Malaysian CPO exporters have to pay an export duty of RM865.80 per MT of CPO exported at the gazetted price of CPO for the calculation of export duties between 27th Dec. 2011 - 2nd Jan 2012 ; CPO price was RM3,619.54 per MT
• Based on the tax paid for CPO export, it effectively converts to a tax rate of 27.9% based on the current BMD price of RM3,100.
• All other palm products except CPO are duty free.
• Malaysian CPO tax discourages CPO export but targets to make available sufficient CPO for refineries.
Source : MPOB
Malaysia’s CPO export tax is computed on graduated scale
MALAYSIA’S CPO EXPORT TAX
Schedule of CPO Export Duty For The Period From 27th Dec. 2011 to 2nd Jan, 2012
REASON FOR LOWER INDONESIAN DOMESTIC CPO PRICE DESPITE BOTH COUNTRIES HAVING HIGH EXPORT DUTY ON CPO
• Excess refining capacity in Malaysia vs. high CPO availability in Indonesia.
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2006 2007 2008 2009 2010
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Malaysia's CPO availability/Refinery capacity (%)
Source : MPOB. Source : Department of Industry of Indonesia & Oilworld
• Supply and demand dis-equilibruim forces Indonesian millers to compete for buyers. In Malaysia’s case, it forces the refiners to compete for CPO. Thus, in Indonesia, refiners are able to obtain lower prices for their CPO compared to their Malaysian counterparts.
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Indo Price Pen. M'sia Price
• Chart above shows Indonesia’s CPO is consistently offered at a discount over Malaysia’s price. • Since the change of export duty structure, effective October, 2011, the discount is higher. This makes the export of refined palm products from Indonesia more competitive.
Source : Indonesia’s CPO price is gathered from PT Astra Agro Lestari daily price. : Malaysian CPO price is obtained from MPOB average local delivery price in Pen. M’sia .
INDONESIA DOMESTIC CPO PRICE VERSUS PENINSULAR LOCAL DELIVERED PRICE
SOME RESPONSES OF GLOBAL OILS AND FATS PLAYERS TO INDONESIAN ANNOUNCEMENT
• When Indonesia’s new tax structure was announced, RBD palm olein declined by USD55/MT while CPO price fell only by USD20/MT in Rotterdam. This is in reaction to the likely rise in Indonesia’s exports of
refined palm oil. (PRICE CUTTING WAR EFFECT) • India announced that the country may increase the import tax for
refined oil to protect its local refineries. To the Indian government, India’s refineries face the risk of short supply of CPO and influx of cheaper Indonesia refined oil with Indonesia’s new export duty. (duty-free CPO from Malaysia favoured)
• In Malaysia, the issue is still being debated and an announcement has
yet to be made. Currently, Indonesia and Malaysia are working together to evaluate options so that a win-win situation can be derived.
SOME IMPACTS ON OILS AND FATS PLAYERS TO INDONESIAN DUTY STRUCTURE
• Indonesia’s packed products, oleochemical and biodiesel sectors will have cost advantage over Malaysian counterparts in exporting these products and will gain market shares.
• Refiners have mixed effects. Local cost of CPO may be lower, but
government tax will add cost especially to integrated players in Indonesia. Uncertain duty rates based on price will deter Indonesian oil from forward sales in preference to spot sales. Malaysian refiners can benefit from ability to sell forward. Malaysian refiners may not be much affected.
• In Malaysia, the issue is still being debated and an announcement has
yet to be made. Currently, Indonesia and Malaysia are working together to evaluate options so that a win-win situation can be derived
SOME IMPACTS ON OILS AND FATS PLAYERS TO INDONESIAN DUTY STRUCTURE
• To help the oleochemical, packed –products and biodiesel industry to compete better, the Indonesian advantage must be neutralised.
• In an oligopolistic market, with few suppliers (only two), if one player subsidised the three sectors, the other player must do the same to maintain market share.
• In Indonesia, the producers subsidises the three sectors. Therefore it is not unusual for the Malaysian producers having to do the same. Otherwise, the industry will operate minus the three sectors which will eventually affect the capacity of the producers to do business because of insufficient infrastructure.
• What is the mechanism for the above to be effected. One option is to develop an industrial development adjustment fund to compensate the three sectors and provide exit strategy for non integrated refiners to strengthen future refinery players
Barriers in Biofuels and
Renewable Energy Sectors:
EU REDD and
US RFS2 Barricades Against Palm Oil
Examples of airlines using
biofuels
Aviation Fuels Requirements
8,000 km Soy Biodiesel
Sundiesel (BtL)
Rapeseed Biodiesel
Bioethanol
Jatropha Biodiesel
Biomethane
Palm Biodiesel
23,660 km
33,000 km
45,500 km
75,330 km
99,600 km
109,000 km
Yield per hectare
6,000 litre
4,980 litre
4,050 litre
2,500 litre
2,500 litre
1,300 litre
440 litre
Source: “Biofuels”, Fachagentur Nachwachsende Rohstoffe e.V. (FNR), 2006 ; Preusser (2008) and own data
No Study / report GHG emission savings
1 Renewable Energy Directive - Default, process not specified
19%
2 Renewable Energy Directive - Default, process with methane capture at oil mill
56%
3 MPOB (with mill waste) 60% 4 MPOB (without mill waste) 75% 5 Carboncapital Solution (with mill waste) 60%
6 Carboncapital Solutions (without mill waste) 80%
7 ISCC ± 55% 8 CSIRO’s study 80% 9 The Gallagher Review (RTFO UK) ± 25 to 70%
Variances in palm oil’s GHG emission savings
Constraints and Challenges
EU Directive GHG emission reduction for palm oil biodiesel
EPA RFS GHG emission reduction for palm oil biodiesel
Seeking public comments currently
EPA Results : Why a disappointing 17%
• Some glaring examples
• Land use change (46 kg CO2e/mmBTU) is 57.5% of total LCA emissions & is major determinant to result in very low rating for palm oil biodiesel
• Unrealistic carbon stock value of 150-200t C/ha used
• Oil palm not grown on such “primary forest” but on degraded forest with low C stock
• Carbon removed as timber not allowed to be given credit and not accounted
Malaysian oil palm industry is land conservation friendly
Parameter Area or %
Malaysian palm oil area 4.85 million ha
Malaysian agricultural land area 6.89 million ha
Total world land area for vegetable oils 244 million ha
Total world agricultural land area 5,660 million ha
Malaysian palm oil as % of total Malaysian agricultural land area
70%
Malaysian palm oil as % of total world land area for oil bearing crops
2.0 %
Malaysian palm oil as % of total world agricultural land area
0.09% ( of 5,660 million ha)
Malaysian palm oil’s contribution to global oils & fats supply
11.4%
Population Growth Drives Preference for palm oil as food, avoiding more land conversion to other oil seed crops
Year Population (billion)
2025 7.9
2040 8.5
2080 9.1
Projected Additional Palm oil to be supplied by Malaysia (m MT)
2.7 5.3 7.7
Estimated Additional land needed for palm oil cultivation in Malaysia (m ha)
0.7 1.4 2.1
Additional land needed to cultivate Rapeseed to offset this oil palm cultivation (m ha)
4.5 9.0 13.4
Additional land needed to cultivate Sunflower to offset oil palm cultivation (m ha)
5.7 11.3 17.0
Additional land needed to cultivate Soybean to offset oil palm cultivation (m ha)
7.2 14.4 21.6
• 7-11 times more land needed if other oil crops were to substitute Malaysian palm oil to meet future demand. • 21.6 m ha of land needed for soybean cultivation in 2080 is equivalent to 2/3 of land area of Malaysia.
EPA Results : Why a disappointing 17% (continued)
• Methane trapping which constitutes 50% of GHG emission not considered
• Unfair as this is allowed with EU & based on such knowledge, Malaysia is introducing CH4 removal under ETP as EPP5
• Malaysian effort to remove large quantities of GHG not recognized (no logic & makes a mockery of Life Cycle Inventory analysis)
• Many more examples
• Summary: palm oil biodiesel gets low rating & fails qualifying test because where credit needs to be given, this is not given. However, debit is fully loaded.
EPA Results : Why a disappointing 17% (continued)
• EPA LCA is very dependent on models
• Wrong models chosen by EPA
• Wrong results therefore
• Example GEOMOD model used to determine the future expansion areas for oil palm
• For Malaysia expansion predicted to take place in Peninsular Malaysia 32,000 ha, Sabah 6,000ha, Sarawak 3,000ha
• As Malaysians we know this is not reality
• In addition, Malaysians going abroad not picked out by model or considered in the LCA study
• All these (plus more not shown here) have caused wrong result (17% emission reduction as given by EPA)
• Currently nearly 80% of Clean Development Mechanism (CDM) projects in Malaysia are from the palm oil industry,
• There are now 423 palm oil mills in the country as of May 2011.
• Out of this figure 38 mills (9%) have completed their biogas facility
• A further 34 are under construction while another 47 more facilities are planned
• By 2012, 28% of the mills will be equipped with methane capture facilities.
• Therefore, the Malaysian palm oil industry has a tremendous opportunity to improve its environmental performances for better market acceptance.
Biomass Renewable Energy Potential – POME
Oil Palm Fronds
Pelletising or pyrolysis
Empty Fruit Bunch (EFB)
Pelletising or pyrolysis
Oil Palm Trunks
Chipping and drying
Shells and Fibres
Pelletising
• Direct combustion • 2nd generation bioethanol / Biomass to Liquid (BtL)
Potential scenarios of life cycle pathways for oil palm biomass conversion into bioenergy
Oil Palm Biomass and Renewable Energy (cont.)
Palm Oil Recovered From
Process Waste Streams
• Several waste streams within the current palm oil process operations could yield valuable outputs: eg. Oil extracted from spent bleaching earth
• Current production capacity is nearly 40,000 MT per annum
• Classified as a waste product and hence qualifies for a significantly lower GHG emission value compared to CPO
• Readily lend itself for aviataion biofuel after cracking
• Oil palm biomass has tremendous potential to produce renewable energy, especially when the emphasis is on industries to reduce their carbon emissions.
• The cellulosic materials in the biomass can also be converted into bioenergy.
• The industry now requeries new technologies such as pyrolysis and cracking to enable use of biomass as a liquid fuel
• Appropriate economic and technology investments are thus anticipated
Oil Palm Biomass and Renewable Energy
• Through various conversion practices, the oil palm biomass can also be converted into value-added products such as pellets, chips and pyrolysis oil for use as bioethanol or Biomass to Liquid (BtL) processes.
• These 2nd generation biofuels have the added advantage of not only meeting the GHG emission savings requirements, it is also not competing for agricultural areas meant for food production.
Malaysian Palm Oil Industry and Renewable Energy (cont.)
Issues of Concern to the Oil Palm Industry
• Deforestation allegations against palm oil by western NGOs.
• A developing country needs to develop, especially its land, just like developed countries. Sustainable agriculture should be redefined to mean that a country has 33 % of its land as permanent forest.
• Arbitrary cut-off date for no deforestation is a blockade to development especially for food security and improved income for the developing countries.
• Irony: developed countries with less forest have used the no deforestation claim to justify their soya and rapeseed as sustainable biofuel, while Malaysia with large tracts of forest is disqualified from participating in the biofuel market because of the cut off date for no deforestation. Penalized for late development
Orang utan conservation
• A 33% permanent forest definition for sustainability may be sufficient for meeting the conservation needs of the orang utans and other wildlife. This appears as the NORM practiced in developed countries.
• Oil palm cultivation also provides a food source for animals which is an added advantage.
• Over production of animals (crowding) has to be managed by culling as done in developed countries.
• Land is needed to produce food and raw materials for over populated metros in Calcutta, Bombay, Cairo and many more where human tragedies due to food shortages are the norm, and priority should be given to help them.
Forest area & deforestation rate in selected countries (1990-2010)
Country Forest area
(Million ha)
Deforestation
( Million ha)
Year 2000 2005 2010 2000-2005 2005-2010
Australia 154.92 153.92 149.30 1.0 4.62
Indonesia 99.41 97.86 94.43 1.55 3.43
Argentina 31.86 30.60 29.40 1.26 1.20
Malaysia 21.59 20.89 20.46 0.70 0.43
Source: FAO Global Forest Resources Assessment (2010)
• Malaysia would not deforest unnecessarily and will continue to use land judiciously
• Committed to Rio Summit pledge – to maintain at least 50% of total land area under forest
Malaysia’s deforestation rate is lowest
MPOWCF Programmes in 2012
A joint effort between SWD and MPOC to establish the Borneo Elephant Wildlife Sanctuary (BEWS). This is aimed to protect and conserve the Pygmy Elephant. BEWS will ultimately become a research and reference centre for the Pygmy Elephant.
Active participation and investments from oil palm sector is anticipated to realize this objective for the long term!
Green house gas emission
• The Malaysian Palm oil industry has negligible carbon foot print of 0.015 % of global total GHG emission.
• Doubling the planted area does not cause any significant increase in emission.
• Durban climate change meeting did not achieve any immediate GHG reduction commitments. Canada withdrew from Kyoto protocol to reserve its right to mine tar sand and continue to generate GHG.
• Why must palm oil be penalized now with GHG reduction commitments through RSPO, RED, and EPA’s RFS2, when the world will only talk seriously on GHG emission in 2020?
• Green protectionism? Green colonialism? Vested Interests?
Unfair treatment given to assessing palm oil biodiesel by implementing governments
• Seen for EU and US
• MPOC has responded to EU Directive by pointing out flaws
• MPOC will be responding to EPA to point out flaws and bias in using methodologies that have caused palm oil biodiesel failing to meet RFS threshold value
Malaysian Responsible and Sustainable Palm Oil Scheme
(MARESPO)
• Malaysia needs to finalise the above scheme.
• Such scheme should qualify MPO to be accepted on aggregate modeling basis such as applicable to soyabean and rapeseed oils from the US and Canada respectively. The farmers there do not have to be individually audited for certification for sustainability- some kind of blanket approval.
• PO is the only one doing it the hard way.
Conclusion
• Malaysian palm Oil has a good story to tell. The EU and US try to deny market access to protect their local industries knowing that WTO will take 5 years to solve complaints, eg “cool”issue recently.
• Producers must play the game of oligopolistic market in responding to the Indonesian duty structure,ie do what they do, or lose market share in the three sectors discussed.
• Urgency is needed to respond to the above issues with all parties actively chasing for the solutions.
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