PLANTATION SECTOR - Indonesia to reduce CPO export tax rate to zero?

- According to recent news reports, Indonesia is considering reducing export taxes to boost competition with Malaysia. Bloomberg cited Trade Minister Gita Wirjawan as saying that ideally, it should be at zero per cent, the same as the tax rate in Malaysia for the month of January 2013.

- The Trade Ministry has held talks with the industry minister on the tax issue. The Indonesian Palm Oil --
Association has asked the government to cut the tax to avoid losing market share in countries such as India. India bought 58% more palm oil from Malaysia in 2012 compared with 2011.

- If Indonesia were to reduce the export tax rate to zero, then this would be positive for the Malaysian refiners but less so for Malaysian upstream players seeking to export directly to customers.

- If the export tax rate were to be zero, then this would eliminate any cost advantage that Indonesian refiners would have resulting from lower cost of CPO. Essentially, things would almost be back to where they were before Indonesia implemented the export tax rate system in late-2011.
Before the implementation of the export tax rate system in late-2011, the price difference between CPO in Malaysia and Indonesia was RM200/tonne to RM300/tonne. After that, the price difference widened to as high as RM700/tonne to RM800/tonne.

- We believe that the elimination of the export tax rate on CPO in Indonesia would increase the domestic CPO price in the country and narrow the price differential with Malaysia.
Malaysian refiners would also have a more level playing field with their Indonesian counterparts. Additionally, there may not be any need for the Malaysian refiners in Sabah to impose such a wide discount to CPO prices on the upstream players.

- The discount to CPO price could revert to the normalised range of RM30/tonne to RM40/tonne instead of RM80/tonne to RM100/tonne currently. Recall that the refiners in Sabah widened the discount to CPO prices so that they can compete with the Indonesian refiners. 
Although the elimination of the export tax rate on CPO would allow Indonesia to export more palm oil in crude form to countries like India, Malaysia could seek to export more refined palm oil to traditional countries like China. 

- In the recent MPOB (Malaysian Palm Oil Board) statistics, it appears that new export markets have also emerged such as Bangladesh, Ghana and Greece.

Source: AmeSecurities