Lower global Crude Palm Oil (CPO) prices have yielded a short term advantage to local edible oil refineries. To better understand the dynamics, a history lesson is in order.
In 2006, Pakistan’s edible oil refining industry began through joint ventures with Malaysia which enabled refineries to be set up. Though Malaysia was the top edible oil producing country, it eventually gave way to Indonesia.
In 2011, Indonesia began to promote its downstream palm oil industry by pushing value added products for exports rather than CPO. Whereas in 2008, CPO accounted for 55 percent of its palm exports, this figure had dropped down to about 20 percent by 2016. (PAPSI)
Export of CPO was discouraged through an export tax of roughly $20-25 per ton. The purpose was to discourage sales of indigenous CPO to the more lucrative international market and maintain supply in the domestic market. Malaysia has a similar export tax structure in place, linked to international CPO prices and MDEX (Malaysia Derivative Exchange).
This impacted Pakistan’s edible oil refineries which found it too expensive to import CPO when RBD (Refined, Bleached, Deodarised) palm oil and other processed products could be imported at better rates. While Pakistan Edible Oil Refiners Association (PEORA) estimates that refineries can consume about 1.5 million tons of CPO annually, the capacity cannot be utilized due to lack of imports.
Global CPO price fell to its lowest point in 12 years in November last year, as per the Association of Indonesian Palm Oil Association (GAPKI). Abundance of global vegetable oil stocks and weak global demand led the price to dip down to $474 per ton.
Glut in the local economy forced Indonesia to ease rules on palm oil levies and derivative products. Media sources report that Indonesia’s export tax has been set at zero for a price of $570 per ton but a charge of $10-25 is added once price rises above. If price hits above $619 per ton, the levy will rise to $20-$50. Similarly, MDEX fell below RM 2250 for CPO so it could be imported without its 4 percent export tax.
Palm oil is a commodity traded internationally. As per Abdul Jan Rasheed Muhammad of the Westbury group, it is bought in Pakistan based on forward contract of one month plus current. As price fell in the last quarter of 2018, purchases of CPO increased. The sector received a boost as unused capacity came into play and refineries that had been closed were revived.
There are twin benefits of being able to import CPO for Pakistan. Firstly, on average refineries save $20-25 per ton. Secondly, imported refined palm oil spends long stretches of time in pipelines and storage during transit which deteriorates its condition. If it was processed locally, its quality would improve.
While October to January were good months for the edible oil refining sector, price of palm oil is expected to rise. High level talks between US and China has led to some purchase of soya beans (read “Understanding global palm oil price” published on January 8, 2019), easing pressure on price of a competing edible oil. As January-March are low production months for the palm oil producing countries, supply will ease as well.
The stockpiles of CPO will allow the Pakistan edible oil sector to make hay while the sun shines. But as price of CPO will rise, imports will again not be feasible. One suggestion to support the edible oil sector is to negotiate for an import quota of CPO since Pakistan has a trade agreement with both countries. An import quota will ensure continuous dependable supply to refineries rather than waiting for changes in price at a global level. By purchasing raw material rather than refined products, the import bill will go down while supporting the local economy through domestic value addition.
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