USDA Outlook: Indonesia cuts export tax on refined palm oil to promote domestic refining, but new policy causing controversy in other countries; Indonesia's palm oil exports forecast to rise 14% year-over-year to 18.9 million tons in 2011/2012

Andrew Rogers

WASHINGTON , December 13, 2011 (press release) – The following article is excerpted from the December Oil Crops Outlook published by the Economic Research Service of the USDA.

Indonesian Change of Export Tax Policy Upsets International Palm Oil Trade

This fall, the Government of Indonesia halved its maximum export tax on refined palm oil to 10 percent, while the tax on crude palm oil was reduced only slightly to 22.5 percent. In addition, the maximum export tax on biodiesel was reduced from 10 percent to 7.5 percent. The substantially wider differential in tax rates is designed to promote domestic refining of the oil, including downstream industries such as biodiesel producers. That change could alter the composition of Indonesia’s palm oil exports. In recent years, more than 60 percent of Indonesia’s palm oil exports were in the form of crude oil. Following implementation of the new export tax rates, export prices for Indonesian refined palm oil were reportedly lower than the price for crude oil. Whether Indonesian exporters can sustain a higher volume of trade in refined palm oil will be determined by the expansion rate for refining capacity in the country. Total exports of palm oil from Indonesia are forecast to rise 14 percent in 2011/12 to 18.9 million tons.

Indonesia’s dominance in global palm oil trade makes its revised policy impossible to ignore, but it is controversial in other countries. India’s vegetable oil refiners fear a substantial loss of business from the change in Indonesia’s export tax structure. Even now India has excess refining capacity for vegetable oil, which is reported close to 20 million tons. From Indonesia alone, India is annually importing close to 5 million tons of palm oil, of which crude palm oil accounts for about 80 percent of the total. But India’s import duty on crude palm oil imports is already at zero, so it becomes more difficult politically to widen the tariff differential for refined oil. Any attempt by India to protect its refining industry by making an offsetting tariff increase for refined palm oil (or to decree a higher reference price on which the tariff is applied) would pass all of the higher cost onto its own consumers. In the EU—Indonesia’s second-largest market—palm oil refiners have voiced similar objections to the Indonesian export tax regime.

Malaysian oil processors, who are the main competitors in the export market for refined palm oil, also see Indonesia threatening their market share. Compared to Malaysian prices, export prices for refined palm oil from Indonesia are now discounted by up to $100 per metric ton. This may force Malaysian exporters of refined palm oil to accept considerably smaller processing margins to preserve market share. Only a marginal increase in Malaysian palm oil exports—to 15.9 million tons from 15.8 million in 2010/11—is expected for 2011/12.

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