Tuesday, July 14

French tax levy will not likely affect CPO prices

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KUCHING: France’s plans to impose an additional tax on palm used in food from 2017 onwards, will not likely affect crude palm oil (CPO) price, analysts say.

The research wing of MIDF Amanah Investment Bank Bhd (MIDF Research) said Malaysia’s palm oil export to France is only 11,156 metric tonnes (MT) or less than 0.1 per cent of Malaysia total export of 17.45 million MT in 2015.

The proposed new tax of 194 euros per MT is also lower than the initial proposal of 300 euros per MT, it added.

According to Reuters, France’s National Assembly had has approved an additional tax between 90 euros to 194 euros per MT on palm oil used in food from 2017 onwards.

The extra tax aimed at encouraging the palm oil sector to reduce the environmental damage that palm oil plantations can cause, Reuters added. Nevertheless, there is an exemption for oils that are produced in a sustainable way.

Copra (coconut) and palm kernel oil, also subject to the tax, are commonly used in commercial cooking and are currently taxed at 113 euros a tonne. The tax would not affect cosmetics and biofuels as vegetable oils are widely used in both sectors.

This tax still needs to be reviewed in the Upper House in three to four months’ time.

“Since the first mention of our bullish view on CPO price target of RM3,000 per MT made on March 7, 2016 (when it was at RM2,493 per MT), CPO three-months futures has surged by 6.5 per cent to RM2,654 per MT yesterday (Thursday).

“We maintain our positive view on the sector and our target of RM3,000 per MT in second quarter 2016 (2Q16),” MIDF Research said.

Meanwhile, palm oil inventories are set to drop further as an El Nino weather event chips away at yields in Southeast Asia, boosting a rally in prices of the tropical oil and helping producers rake in more profits for the first time since 2011.

Brokerage UOB Kay Hian says there is a high possibility of the world’s biggest buyers, India and China, replenishing their palm oil supplies after low imports in February, tightening stockpiles further, according to a Reuters report.

“Demand is also likely to get a boost before the Muslim holy month of Ramadan, which begins in June this year and when consumption of edible oils rises. Malaysian exports have already picked up 10.5 percent month-on-month in the first half of March,” the report said.

“This combination of factors could not have come at a more opportune time for Southeast Asian palm oil producing firms, which have been struggling with declining cumulative profits for the past four years with palm oil prices down around 22 percent.”

Twelve of the biggest such companies, including IOI Corp and Golden Agri-Resources Ltd, are expected to report combined profit growth of 20 per cent in 2016, according to Thomson Reuters StarMine Mean Estimates.

The challenge for them will lie in their ability to control costs linked to lower output and a five per cent tax on April crude palm oil exports from Malaysia after 11 months of duty-free sales.

“It is possible that profits will improve as a result of higher prices but we have to bear in mind that profits will be held down by increasing costs,” said Roy Lim, group plantations director of palm oil firm Kuala Lumpur Kepong Bhd in the Reuters note.