Malaysia’s delayed export tax cut to weigh on CPO price

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KUALA LUMPUR: Malaysian planters and crude palm oil (CPO) could face price pressures this week on profit taking, following the disappointment of having to wait until Jan 1 for the implementation of a CPO export tax cut and scrapping of the tax-free quota to help trim record high inventories, industry experts said. There’s also the uncertainty over Indonesia’s response.

Jim Teh, senior palm oil trader at Interband Group of Companies, expects palm oil prices to remain range-bound at RM2,300 to RM2,400 on profit taking this week. December CPO contracts — which climbed 6.5% from last Tuesday to Thursday — dipped as much as RM144 or 5.7% to RM2,379 per tonne before recovering in the last half hour of trade to end Friday with a smaller 0.91% day-loss at RM2,500 per tonne.

What the experts found most puzzling was the 2½-month delay for the decision to take effect, given that last Wednesday’s data showed September CPO inventories hitting a record high of 2.48 million tonnes. Analysts are forecasting even higher stockpiles for October.

“Why wait to be competitive? Why not just scrap the tax-free CPO permits now instead of waiting until next year and asking those that are not using the permits themselves to surrender them?” asked one analyst. Half of the tax-free export quota, which increased from 3.6 million tonnes to 5.6 million in June, had reportedly not been used.

OSK Research analyst Alvin Tai, for one, reckons that the government should impose the export tax cut “immediately as stockpiles are already very high”. “The measures look good, but there may not be any immediate benefit to the industry as they are only effective next year,” Tai told The Edge Financial Daily.

He had forecast a 7% jump in CPO inventories to between 2.6 million and 2.7 million tonnes in October after the 17% increase from August to September, expecting the seasonal rise in production to outpace any pick-up in exports.

Recipients of the CPO tax-free quota are

likely the ones to be hit by the scrapping of

the free quota from next year.

Another plantation analyst said Malaysia’s decision to slash the CPO export tax from 23% currently to between 4.5% and 8.5% for CPO prices between RM2,250 and RM3,600 does appear to close much of the duties gap with rival producing country Indonesia.

This gap, which analysts compare with Malaysia’s CPO export tax to decide competitiveness, is currently around 7.5%, based on existing tax rates of 13.5% for CPO and 6% for refined, bleached and deodorised (RBD) palm olein. Indonesia fixes the rate of export duties each month based on global prices. Malaysia taxes CPO exports but not refined products.

In the immediate term, analysts say recipients of the CPO tax-free quota are likely the ones to be hit by the scrapping of the free quota from next year. Nonetheless, the recipients with plantations could well see a net benefit if CPO prices rise as stockpile levels fall.

Felda Ventures Global Holdings Bhd (FGV), Sime Darby Bhd and IOI Corp Bhd are reportedly among the planters with tax-free quotas. But permits were also given to non-planters, which officials reportedly decline to name.

FGV shares are on watch, following the stock’s recent dip near its IPO price of RM4.55, but Felda chairman Tan Sri Isa Abdul Samad told reporters the slide was “not worrying”.

Palm Oil Refiners Association of Malaysia (Poram) CEO Mohammad Jaaffar Ahmad said the association “welcomes the government’s announcement” on the export tax cut and the discontinuation of tax-free shipment quota from Jan 1, 2013.

 

This article first appeared in The Edge Financial Daily, on Oct 15, 2012.

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