Money Matters

A closer look 

By Majyd Aziz
Mon, 02, 16

Human beings have been using palm oil since 3000 BC and, in fact, everyone consumes products that have palm oil component. Palm oil is considered the common man's oil. Pakistan has become a major player in the global palm oil market since palm oil has a 71 percent share in the edible oil market. This is mainly due to low cost and high demand for hydrogenated oils (Banaspati) that has a share of 60 percent compared to cooking oil with share of 40 percent. Pakistan, being the fourth largest importer of palm oil, has become a hot competitive destination for major palm oil growing countries, Indonesia and Malaysia. These two ASEAN countries are the two dominant global suppliers overseeing four fifths of global production while responsible for nine tenths of world trade. Pakistani imports depict a marked preference for Indonesian palm oil, especially after Preferential Trade Agreement with Indonesia even though there is a Free Trade Agreement with Malaysia. The share of Indonesia in exports to Pakistan was 42 percent, 73 percent and 83 percent in 2013, 2014 and 2015 respectively, while of Malaysia was 58 percent, 28 percent and 17 percent in these three years.

The global production of palm oil is increasing at a brisk rate from 46.20 million metric tonnes (MMT) in 2010 to 62.40 MMT in 2015. The future projections are also positive, with experts predicting total production to touch the 90 MMT figure by 2025. The share of Indonesia in 2015 was 33 MMT while of Malaysia was a tad over 20 MMT. World palm oil exports increased sharply to nearly 48 million MMT in 2015, which depicts its huge demand. India imported 9.5 MMT while Pakistan bought 2.5 MMT. Pakistan's import of palm oil consists of Olien, Refined Bleached Deodorized Palm Oil (RBDPO), and Crude Palm Oil (CPO). Due to a limited refining base, Pakistan only imported 104,000 metric tonnes of Crude Palm Oil. Pakistan’s palm oil imports declined to $1.8 billion in Fiscal Year 2015 from $1.9 billion in the preceding year, mainly because of softening palm oil prices internationally. Although the prognosis is that Pakistan's palm oil demand would remain steady in the next few years, major players like prominent businessman Najib Balagamwala are convinced that a shift towards soybean oil would reduce the overall demand of palm oil.

At present, in Pakistan, the duty structure for palm oil products is as follows:

World experts and officials promote their own views and opinions on the present and future of the palm oil sector. Thomas Mielke of Oil World, Germany, a leading private authority on oilseeds, oil and meals, has a bearish outlook for palm oil prices in 2016. According to him, with prices of global commodities plummeting due to economic slowdown, geo-political risks, financial uncertainties, dwindling prices in the world equities market, weather dryness caused by El Niño resulting in crop damage, weak global energy prices, a slowdown in the Chinese economy, and a shift towards soybeans, the price of palm oil products would remain under pressure. Dorab Mistry, Director of Godrej International of India, also agrees on the effects of El Niño on crop production. He terms it as a "triple whammy of dry weather, biological low cycle, and seasonal low period". He also maintains that a huge demand for soybeans by China that could be as high as 84 MMT would also negatively influence overall palm oil demand.

Kanya Lakshmi Sidarta of Indonesian Palm Oil Association states that, "Indonesian palm oil is now trending towards a more diversified downstream product, contributing a significant 13 percent share of total export earnings". She further added, "palm oil results in stabilization of food prices and is an important source for renewable energy. Palm oil is considered to be the most competitive feedstock for sustainable biodiesel".

The Indonesian government has mandated the use of palm oil to produce biodiesel for domestic needs. At present, over two MMT per year has been diverted towards producing bio-fuels. Paulus Tjakrawan of Indonesia Biofuels Producer Association estimated that bio-fuels demand in Indonesia would rise from 5.50 MMT in 2015 to nearly 8.0 MMT in 2016 and projections are that it would reach 24 MMT by 2025. According to him, the share of bio-fuels in producing energy is 20 percent in transportation, in industry, and in SME, agriculture, and fisheries sectors while it is 30 percent in power generation.

Notwithstanding the estimates of Mr Tjakrawan regarding increased diversification of palm oil to produce bio-fuels, Mr Mistry sees a Catch-22 situation. He cautioned that, "the main determinant of the success or otherwise of the biodiesel mandate will be the price of Gas Oil or Mineral Diesel in South East Asia. If the price of Gas Oil remains low around $450 per MT and the local domestic price of CPO in Indonesia (without Export Tax ) rises to $500, then it will require a subsidy of $160 per MT to make biodiesel workable.

If the price of CPO rises to $550, the subsidy required would be a massive $210 per MT. That will reduce the tonnage of biodiesel that can be subsidized and therefore consumed. So it can be said that the biodiesel program has an in-built bias towards the price of mineral diesel and also has a self-correcting mechanism."

The foreseeable global position is that palm oil, although universally accepted as a much-desired commodity, would be susceptible to many extenuating circumstances. The production can only be increased through allocation of more cultivable land in Indonesia and Malaysia, especially if they have to maintain their strong global presence. At the same time, major importing countries, like Pakistan, would hedge their bets and rely more on alternate crops, such as soybeans.

A strong indication is that imports of soybeans that were about 9,000 MT in 2014 shot up to 580,000 MT in 2015 despite increased imports of palm oil products. It is now imperative that the Pakistan Vanaspati Manufacturers Association, All Pakistan Solvent Extractors Association, Pakistan Edible Oil Refiners Association, and relevant indentors, importers and facilitators, agree on a joint harmonious and institutionalized approach, so that not only government policies are rationalized for promotion of the edible oil industry, but also to promote a favorable, efficient and formidable position of Pakistan as a major global player.

The writer is former president of KCCI


Palm Oil Duty Structure : Pak Rupees / Metric Tonnes

Palm Oil         Import Additional      Sales   Federal Excise Income

Product         Duty   Duty   Tax     Duty   Tax

Olien   7742.50         1%     16%    1000.00         5.5%

RBDPO 9230.00         1%     16%    1000.00         5.5%

CPO    6850.00         1%     16%    1000.00         5.5%