Proposal to cut CPO export rates a good move for local upstream players

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KUCHING: The proposal to cut export rates for crude palm oil (CPO) from a current 23 per cent down to eight to 10 per cent was seen by analysts as a good move for upstream plantation players but would not leave any impact for local refiners.

Plantation Industries and Commodities Minister Tan Sri Bernard Dompok presented a proposal to the Cabinet to cut CPO export rates from a current 23 per cent to eight to 10 per cent.

Dompok was also expected to ask for companies with unutilised tax-free export quotas to surrender to those to other companies that were able to export CPO.

“We believe the move will be positive for the price of palm oil as it makes the export of CPO less prohibitively expensive,” noted Alvin Tai, an analyst at OSK Research Sdn Bhd (OSK Research).

“Upstream players now have an alternative to ship CPO by themselves as a last option if they are unable to sell to refiners.”

An analyst from Maybank Investment Bank Bhd (Maybank IB), Ong Chee Ting told The Borneo Post in an email that this proposal could be the solution long awaited by local players to remain competitive on the international markets.

“I believe this could be the solution.

“At least the upstream players will have the choice to either sell their CPO to international buyers or sell them to local refiners.

The local refiners are holding back purchases because they experience negative margins.

“Previously, the 23 per cent export tax rate is just too much to stomach for upstream players.

“A eight to 10 per cent export tax rate is a short term pain to upstream players but at least they can clear their CPO tanks which are overflowing during these peak production period which I believe is the key reason for the sharp drop in CPO price.”

Malaysia’s export quota system came under the spotlight since last year after Indonesia slashed its export tax on refined palm oil and raised tariffs for the crude upgrade to keep more of it in the country for processing.

Consequently, Malaysian refiners struggled to compete against Indonesian rivals that enjoyed better margins of US$20 to US$30 per tonne with growing national production and refined palm oil export taxes that we now half of that of CPO.

However, Tai from OSK Research did not believe that the move would address the issues faced by downstream players which centre on competitiveness against Indonesian refiners.

“For Malaysian refiners to match their Indonesian counterparts’ price competitiveness, two key elements need to be present,” he explained.

“The differences between CPO’s and refined products’ export duties need to be closer to Indonesia’s,” he opined, revealing that currently, the Malaysian government is making efforts to reduce the differential but was still less than Indonesia’s 13.5 per cent.” Tai also noted that the competitive advantage of Indonesian refineries’ was derived from their ability to buy CPO cheaper due to domestic price being adjusted lower by the quantum of their CPO export duty.

“With this cut in the CPO export tax, Malaysian refiners are still buying raw materials at the same price as before, hence not being any more competitive than before,” he added.

On the other hand, Maybank IB’s Ong believed the proposed tax cut was meant to address the issues of high CPO prices for refineries in Malaysia.

“The proposed CPO export tax cut is meant to address this.

I believe when they will be able to buy CPO at cheaper prices when this is implemented,” he noted.

Nevertheless, the reallocation of un-utilised tax-free CPO export quota was seen as highly positive for the industry.

“It does appear that some quota was given to parties who were not able to shift inventory, so this reallocation will help to reduce excess CPO.

“According to the minister, there was still a quota of approximately 2.5 million tonnes of CPO to be used up.

If there is demand, Malaysia’s CPO inventory of 1.2 million tonnes could be dramatically reduced,” Tai concluded.

In the short term period, Maybank IB’s Ong believed the impact would be negative but it will turn positive in the medium term.

“In the short term, the export tax will be a ‘lost revenue’ to the upstream players and hence impacts their profits,” Ong explained.

“But CPO prices should recover once the high inventory level in Malaysia eases.”