Call for Msia to review CPO export duties

KUALA LUMPUR: Malaysia should review the current crude palm oil (CPO) export duty structure following Indonesia’s introduction of new palm oil levies. 

In its notes to investors last Friday, CIMB Investment Bank said that Indonesia’s newly introduced US$50 tonne levy on CPO and US$10-US$30/tonne levy on processed palm oil have eroded Malaysian refiners’ competitiveness when the CPO price is below RM2,250 per tonne. 

This is shifting Malaysian exports towards CPO, which could reduce the value add of Malaysian palm products. 

“Refiners in Malaysia are expected to face stiffer competition from Indonesian refiners in the coming months following Indonesia’s introduction of the new palm oil levies if CPO price stays below RM2,250 per tonnes,” said CIMB Investment Bank analyst Ivy Ng. 

On July 16, Indonesia implemented a new export levy of US$10- US$50 per tonne for various palm oil products. This is on top of the recently revised export taxes that Indonesian palm oil producers are required to pay when CPO prices exceed US$750 per tonne. 

The new export levy has lowered the domestic CPO price in Indonesia by US$30-US$50 per tonne, helping to improve the processing margins of downstream processors in Indonesia. This is because refiners in Indonesia currently enjoy a margin advantage due to the differential in the export levy for refined palm products versus CPO. 

Ng explained that the export levy gap for refined, bleached and deodorised (RBD) palm oil is US$30 per tonne (CPO levy of US$50 per tonne minus RBD palm oil levy of US$20 per tonne). 

Prior to this, there was no margin advantage for Indonesian refiners as the export tax for both palm products was zero as CPO price was below US$750 since October last year. 

“The CPO levy is positive for Indonesian refiners and negative for refiners in Malaysia,” she said. 

Malaysian refiners will again be disadvantaged as they do not enjoy the same margin advantage of US$30 per tonne since the export tax for both CPO and processed palm products is currently zero. 

This is because CPO price in Malaysia is below RM2,250, the threshold price that triggers export tax in the country. 

Ng noted this is the same issue faced by Malaysian refiners when Indonesia revised its export tax on August 15 2011 to encourage downstream activities in Indonesia. 

The Malaysian government only reacted to this move a year later by cutting its CPO export tax to 4.5 per cent to 8.5 per cent and scrapping its tax free CPO quota from January 2013 to restore Malaysian refiners’ competitiveness in order to reduce stockpiles. 

The revised export tax structure in Malaysia from January 2013 mimics the Indonesian tax structure with a one to two per cent disadvantage, which is compensated by Malaysia’s better infrastructure. 

CIMB analyst highlighted that government statistics reveal that CPO’s share of total palm oil exports has increased from 16 per cent in 2010 to 28 per cent this year. This means that there are less raw materials available to local refineries. 

“Malaysia’s CPO tax structure should be reviewed. But we think the government will only react to this when there is evidence that the country is losing market share to Indonesia, leading to accumulation of palm oil inventories in Malaysia," the analyst said. 

Realistically, this will only happen if CPO price stays below RM2,250 for a prolonged period of time. 

Should Malaysia revise its export tax to take into consideration Indonesian CPO levies, it would be short-term negative for Malaysian palm oil producers as it could lead to lower domestic CPO prices. 

However, Ng think that the government is not likely to implement this in the near term as it could weaken the already low CPO price and reduce the incomes of the country’s palm oil smallholders. 

Ng noted that Malaysia’s palm oil refining margin has improved recently as the prices for refined palm products have held steady despite the sharp fall in crude oil prices. “We believe the improved margin could be partly due to the recent sharp correction of the ringgit (most processed palm products exported in US$ terms) and the current high production season.”