THE BUZZ
Malaysia’s Plantation Industries and Commodities Minister Tan Sri Bernard Dompok will present a proposal to the cabinet tomorrow to cut CPO export taxes from the current 23% to 8%-10%. Dompok will also ask for companies with unutilized tax-free export quotas to surrender those to other companies that are able to export CPO.
OUR TAKE
We believe the move will be positive for the palm oil price as it makes the export of CPO less prohibitively expensive. Upstream players now have an alternative to ship CPO by themselves, as a last option, if they are unable to sell to refiners. However, contrary to what was said by the minister, we do not think the move addresses the issues faced by downstream players, which centre around uncompetitiveness against Indonesian refiners.
Malaysia’s Plantation Industries and Commodities Minister Tan Sri Bernard Dompok will present a proposal to the cabinet tomorrow to cut CPO export taxes from the current 23% to 8%-10%. Dompok will also ask for companies with unutilized tax-free export quotas to surrender those to other companies that are able to export CPO.
OUR TAKE
We believe the move will be positive for the palm oil price as it makes the export of CPO less prohibitively expensive. Upstream players now have an alternative to ship CPO by themselves, as a last option, if they are unable to sell to refiners. However, contrary to what was said by the minister, we do not think the move addresses the issues faced by downstream players, which centre around uncompetitiveness against Indonesian refiners.
For Malaysian refiners to match their Indonesian counterparts’ price competitiveness, two key elements need to be present:
i. The differential between CPO’s and refined products’ export duties needs to be closer to Indonesia’s. In the current scenario, the Malaysian government is reducing the differential, but it is still less than Indonesia’s 13.5%. ii. Indonesian refineries' competitive advantage comes from their ability to buy CPO cheaper due to the domestic price being adjusted down by the quantum of their CPO export duty. With this cut in the CPO export tax, Malaysian refiners are still buying raw material at the same price as before, hence no more competitive.
The reallocation of unutilized tax-free CPO export quota is highly positive. 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 is still a quota of about 2.5m tonnes of CPO to be used up. If there is demand, Malaysia’s CPO inventory of 1.2m tonnes could be dramatically reduced. Maintain OVERWEIGHT on the sector.
i. The differential between CPO’s and refined products’ export duties needs to be closer to Indonesia’s. In the current scenario, the Malaysian government is reducing the differential, but it is still less than Indonesia’s 13.5%. ii. Indonesian refineries' competitive advantage comes from their ability to buy CPO cheaper due to the domestic price being adjusted down by the quantum of their CPO export duty. With this cut in the CPO export tax, Malaysian refiners are still buying raw material at the same price as before, hence no more competitive.
The reallocation of unutilized tax-free CPO export quota is highly positive. 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 is still a quota of about 2.5m tonnes of CPO to be used up. If there is demand, Malaysia’s CPO inventory of 1.2m tonnes could be dramatically reduced. Maintain OVERWEIGHT on the sector.
Source: OSK
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