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Kuala Lumpur. Lower taxes on refined edible oil exports from top crude palm oil producer Indonesia are set to boost cooking oil supplies in the region, eroding margins for Malaysia and making cargoes cheaper for buyers.

For decades, refined, bleached and deodorized palm olein used in cooking oil enjoyed premiums of 5 to 10 percent over crude palm oil futures as No. 2 producer Malaysia was the sole supplier with tax-free exports and massive processing capacity.

Indonesia’s move to halve taxes on refined edible oil exports from October will draw more crude palm oil into its refineries, though, limiting supply for processors and raising feedstock costs.

“Such a move by the Indonesian government demands a variety of responses because it is a game-changer,” said Thomas Mielke, head of global oilseed analyst Oil World. “Export prices for refined palm oils will come down, importers will adjust their purchasing habits and the Malaysians will defend their market share.”

The economics are compelling for Indonesia. Its margin for RBD palm olein could double to $100 per ton from current levels, a survey of six traders showed.

As Indonesia ships more refined palm oil, Malaysia will have to slash prices to compete — an inflation-busting prospect for top vegetable oil importer India.

That adds to the list of problems Malaysian refiners face, including a strong ringgit and domestic output that is growing at a much slower rate than Indonesia.

“Refiners in Malaysia are getting anxious. They are meeting with the Malaysian government to see what can be done,” said a trader with an international trading house in Kuala Lumpur.

“The message is clear: the difference now between the winners and the losers is having an Indonesian refinery.”

Three years ago, Jakarta first set an export tax for palm-based biofuel at a lower rate than crude palm oil, spurring Indonesian firms to turn palm oil into the renewable fuel and corner the European market.

Indonesia exported 500,000 tons of biodiesel in the first half of this year as margins were double that of Malaysia, which shipped out 7,000 tons of tax-free exports, according to industry estimates.

For India, where food inflation recently hit its highest mark in six months, the tax changes shift the economics toward imports of refined palm oil.

Indonesia will cap its export tax for the edible oil at 22.5 percent from 25 percent previously, while the cap on palm oil olein products was cut to 13 percent from 25 percent. Applying the new rates to current prices, Indonesian crude palm will cost $1,270 while RBD palm olein would cost $1,249.

Even with India imposing a 7.5 percent import tax, the final bill for a ton of RBD palm olein is $1,336 — just 5 percent more than imports of tax-free crude palm oil.

“There are cost savings in importing the finished product rather than spending money to import crude palm oil and refine it in India. We could see some shutdown in Indian capacity,” said Sandeep Bajoria, chief executive of Sunvin Group. “At least 500,000 tons of refined palm olein will be taken up instead of crude palm oil in the short term.”

That would be a 40 percent jump in refined palm olein imports that stood at 1.2 million tons in the marketing year ended October 2010. India’s crude palm oil imports over the same period were 5.2 million tons.

A major hurdle for Indonesia’s processed palm oil export push lies in the big refining capacity gap it has with Malaysia.

Indonesia does not have data on refining capacity, but last year it shipped out 6.8 million tons of refined palm oil products that made up 43 percent of a total of 15.6 million tons exported, according to industry data. That compares with Malaysia exporting 13.9 million tons of refined palm oil, accounting for 84 percent of total shipments.

“It is not just about importing more refined products. We could see a shift in business strategy. Indian and Chinese companies are surely going to set up plants in Indonesia,” said a trader in Jakar ta with a leading plantation house.

“The time to bridge that gap and get a critical mass would take at least three years.”

Those potential palm oil investments can boost foreign direct investment that has hit $9.6 billion so far this year and is on track for a record high.

Palm oil firms can profit from the new export tax, Standard Chartered Bank said.

“Our only concern is that this change in landscape will prompt a raft of new capacity, which could rapidly erode the economic benefit,” Standard Chartered analysts Adrian Foulger and Teo Joo Eng said in a note.

Reuters