This article first appeared in The Edge Financial Daily, on October 21, 2015.

KUALA LUMPUR: As competition from soybean oil and lacklustre demand from China weigh on the local palm oil sector, palm oil industry players are calling for the government to allocate more funds to the promotion of palm oil research and development (R&D) and biodiesel subsidies in Budget 2016, which will be tabled on Friday. 

Malaysian Palm Oil Council (MPOC) chairman Datuk Lee Yeow Chor told The Edge Financial Daily the government has provided RM10 million this year, with the industry contributing another RM37 million for the promotion of palm oil.

“Compared with Indonesia, which is projecting US$800 million for promotion, R&D and biodiesel subsidies, I think we need to increase our funding towards promotion, R&D and maybe even for biodiesel,” he added.

Lee, who is also the chief executive officer (CEO) of IOI Corp Bhd, said the government’s subsidy rationalisation policy should also be applied to cooking oil as the government has been maintaining the price of cooking oil for more than two decades.

“It is artificially low. That will create a distortion and market anomalies like smuggling and pilferage,” he said, adding that funds gained from the revision of the rates fixed for cooking oil can also be channelled to the promotion of palm oil as well as R&D.

“The [cooking oil] subsidy burden is being collectively borne by government and industry.”

In 2013, the government allocated RM1.5 billion for cooking oil subsidies, lower than RM1.7 billion in 2012.

United Malacca Bhd CEO Peter Benjamin concurred, saying a higher allocation for palm oil promotion can be facilitated by the agreement reached by both Malaysian and Indonesian governments to establish the Council of Palm Oil Producing Countries (CPOP).

“There should be promotion of palm oil in the United States, Europe, Asean, China and India,” he said.

The CPOP, announced by Prime Minister Datuk Seri Najib Razak on Oct 11, allows for both the Malaysian and Indonesian governments to work closely with industry leaders.

Crude palm oil (CPO) is facing intense competition from soybean oil, which hit record production levels last year, estimated to continue this year.

The price difference between CPO and soybean oil has narrowed considerably to an average of 9.9% in 2014 from 26.1% in 2008, Bloomberg reported on May 6.

Benjamin also said a reduction in corporate tax by at least 2% during this economic slowdown will also help companies as it would stave off job cuts.

He also said the windfall tax imposed on CPO could be converted to biodiesel subsidies and biodiesel usage should be widened to other industries, especially power plants.

According to the Royal Malaysian Customs website, a windfall tax is charged at a rate of 3% on palm oil prices above RM2,500 per tonne in Peninsular Malaysia and at a rate of 1.5% on palm oil price above RM3,000 per tonne  in Sabah and Sarawak.

Felda Global Ventures Holdings Bhd group president and CEO Datuk Mohd Emir Mavani Abdullah hopes that the upcoming budget will include incentives for R&D of specialty fats and oleochemicals to spur the palm oil industry’s downstream activity.

“The same goes for biomass 

activity, which has huge potential to be commercialised for the benefit of the industry and the nation,” he said.

“It demonstrates Malaysia’s commitment towards addressing global warming and climate change as well,” he added.

Mohd Emir also hopes the government will implement the B10 biodiesel mandate soon, from the current B7 programme, as the former is expected to soak up one million tonnes of CPO a year, thereby reducing palm oil stocks, which may lend support to palm oil prices.

The B10 biodiesel mandate will see 10% of palm methyl ester added to 90% petroleum diesel, while the B7 programme involves 7% of palm methyl ester added to 93% petroleum diesel.

Mohd Emir also said Malaysia should review the current CPO export duty structure in order to stay competitive.

He said Indonesia introduced new CPO levies in July 2015, which affected Malaysian refiners’ competitiveness when the CPO price fell below RM2,250 per tonne.

“The new export levy has lowered the domestic CPO price in Indonesia by US$30 (RM127.80) to US$50 per tonne, helping them to enjoy a margin advantage due to the differential in the export levy for refined palm products versus CPO,” he added.

He also said the government should harmonise state sales tax for Sabah and Sarawak as they have different state sales tax structures.