UPDATE 1-Singapore firms stop Indonesia palm oil exports to Iran

>

* Edible oil refineries in Iran barely operating

* Indonesia concerned about defaults in payments

* Malaysia's trade min: palm oil exporters can depend on other markets

By Niluksi Koswanage

KUALA LUMPUR, Feb 9 (Reuters) - Singaporean firms have stopped supplying Iran with Indonesian palm oil on concerns over the country's ability to make payments in the wake of Western sanctions, trading sources in Singapore said on Thursday.

Palm oil traders in Southeast Asia, which supplies 90 percent of the vegetable oil globally, stopped taking Iranian letters of credit late last year ahead of fresh U.S. and European sanctions at the start of 2012.

The halt in palm oil supplies comes on top of payment problems for Indian rice and European grain to Iran, showing that sanctions are starting to curb the country's supply of staple food.

Indonesia supplies around 50,000 tonnes a month, or slightly more than half of Iran's needs, said the Singaporean traders, who declined to be named due to the sensitivity of the issue. Most of Indonesia's palm oil deals are done in Singapore, a trading hub for the region.

"I can confirm that Singaporean firms have stopped. We don't want to go anywhere near Iran at this moment, it is too risky," said a trader with a listed Singaporean firm that ships Indonesian palm oil cargoes to the Middle East and Iran.

Indonesia is the world's largest producer of the vegetable oil, which is used in products ranging from biodiesel to cooking oil and margarine.

A trading source from Saudi Arabia whose firm runs a 16,000 tonne a year refinery in Iran said the country's edible oil refineries were barely operating thanks to the supply cut.

"My company has a refinery in Iran and we cannot really source much palm oil these days, be it from Indonesia or Malaysia," said the Saudi Arabian trader, who declined to be named as he is not authorised to speak to the media.

"It is really hurting our business. We keep asking for supply but no one is willing to give."

Palm oil exporters in Malaysia have also stopped supplying Iran with most of the 30,000 tonnes of the food staple the Middle Eastern country typically buys from the country each month, traders told Reuters on Wednesday.

Malaysian government officials on Thursday sought to downplay the impact on the country's palm oil trade.

"Some exporters have voiced their concerns on the sanctions on Iran," Trade Minister Mustapha Mohamed told reporters. "For whatever impact coming from the sanction, their market will be compensated from other export markets."

PAYMENT DEFAULTS

Indonesia's share of the Iranian palm oil market has been rising at the expense of Malaysia, which faces slowing production growth.

Iran bought over half a billion dollars of palm oil shipments from the two southeast Asian producers in 2009, according to Iranian Vegetable Oils Industrialist Association data quoted by the Malaysian Palm Oil Council, making it the largest market in the Middle East.

Secretary general of Indonesia's Palm Oil Association, Joko Supriyanto, said two local companies, PT Musim Mas and PT Wilmar Nabati Indonesia, supply some of the cargoes heading to Iran.

"A payment default could also happen to Indonesian exporters. So Indonesian palm oil exporters have to be careful dealing with Iran importers," Supriyanto told Reuters.

Senior officials from PT Musim Mas and PT Wilmar Nabati Indonesia, a unit of Singapore-listed Wilmar International , told Reuters their firms do not directly export palm oil to Iran.

"Malaysian and Indonesian exporters may find it hard to let go of such an important market like Iran and they may try to supply via third parties. But do people want to take that risk as intermediaries is the question," said a second trader from Singapore with knowledge of the issue.

"Whatever it is, the sanctions have slowed palm oil exports to Iran, direct or indirect, to a trickle."

Stocks Markets Industrials Non-Cyclical Consumer Goods Related Quotes and News Company Price Related News