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Palm-Oil Refining Capacity in Indonesia Seen Exceeding Crop

Palm-oil refining capacity in Indonesia may climb to more than 30 million metric tons next year, exceeding output in the largest producer as companies step up investments following tax changes, according to UBS AG.

“The capacity surge is due to increased profitability from the government’s reduction of export taxes on refined oils,” Andreas Bokkenheuser, an analyst in Singapore, said in reply to e-mailed questions. “The total capacity size will grow above 30 million tons, which is higher than” crude production, he said.

Southeast Asia’s largest economy cut taxes in October last year to boost processed exports as it seeks to raise the value of commodity shipments to spur economic growth and create jobs. The increase in refining capacity may put margins under pressure, Bokkenheuser said, without giving estimates.

“With the current tax structure there is about $1 billion of investments coming in,” Sahat Sinaga, executive director of the Indonesian Vegetable Oil Industry Association, said by phone from Jakarta yesterday. “Production is close to the installed capacity of 23 million tons. But it has not yet reached full capacity because we still export crude palm oil.”

Palm oil has tumbled into a bear market as stockpiles in Malaysia, the second-largest producer, gained to a record last month while slower global economic growth cut demand. Futures on the Malaysia Derivatives Exchange, a global benchmark, ended at 2,501 ringgit ($819) a ton yesterday, 31 percent lower than the year’s closing high on April 10. The January-delivery contract fell 0.2 percent to 2,496 ringgit today.

Processed Shipments

Processed palm oil will account for 61 percent of total shipments this year, with crude accounting for the rest, which is a reversal from last year, when crude palm oil made up 60 percent of the total, Sahat said. Installed refining capacity may increase to 25 million tons in 2013, Sahat said.

Malaysia and Indonesia represent about 89 percent of global shipments of the world’s most-used cooking oil. Last year, Indonesia cut the maximum export duty on refined, bleached and deodorized palm oil to 10 percent from 23 percent, while setting the highest tax for crude exports at 22.5 percent. Malaysia announced reforms this month, effective Jan. 1, including dropping a duty-free quota for crude shipments.

Indonesia’s output may rise 5.2 percent to 26.2 million tons in 2013 from an estimated 24.9 million tons this year, according to a UBS report dated Oct. 12. The U.S. Department of Agriculture forecasts Indonesian production of 27 million tons in 2012-2013 from 25.4 million tons the year before.

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