Analysts cautious on CPO export tax exemption

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KUALA LUMPUR (Sept 05): Analysts view the exemption of duty on export of crude palm oil in September and October cautiously, despite the government’s assessment that the suspension will improve the commodity’s market fundamentals.

Affin Investment Bank has downgraded palm oil stocks from ‘overweight’ to ‘neutral’ following the government’s announcement yesterday, while CIMB Investment Bank has maintained its ‘neutral’ call.

CIMB said the exemption is positive for CPO exports but will dent the earnings of Malaysian refiners, as it will erode their competitiveness against their Indonesian peers.  

“We view Malaysia's decision to exempt CPO from export taxes in Sept and Oct as positive for CPO exports in the near term, as the CPO export tax will be much lower compared to Indonesia's 9% for Sept 14,” said CIMB analyst Ivy Ng today, in a report.

“Following this, the export tax differential between refined palm oil products and CPO will be zero in Malaysia, against 9% pts for the Indonesian refiners.

“However, the CPO tax advantage against Indonesia may not last as we head into Oct, as there is a likelihood that Indonesia will also adjust its CPO export tax down to zero, if CPO prices stay at current levels and average below US$750 per tonne.”

Ng said the exemption will help keep palm oil stocks manageable, but may not be able to lift the current bearish sentiment engulfing the CPO market, due to concerns over rising edible oil supply in the coming months.

She said pure upstream palm oil players in Malaysia may benefit the most from this measure in the near term, while planters with significant downstream operations in Malaysia may be dented by this move in the near term.

However, it will not significantly impact CIMB’s earnings projections on the companies that it covers.

“We retain our Neutral sector rating and preference for First Resources Ltd,” she said.

Plantation Industries and Commodities Minister Datuk Seri Douglas Uggah Embas said yesterday that the exemption will help stymy further declining CPO prices and will reduce stock levels to 1.6 million tonnes by the end of the year, adding that the ministry is preparing a proposal to speed up the implementation of the B7-biodiesel mandate.

The B7 programme, with a biodiesel blend comprising 7% palm oil methyl ester, will be implemented on Dec 01, if approved.

Affin said that it expects the short-term outlook for the oil palm plantation sector to remain dim, due to the continuance of bearish factors affecting CPO prices.

“With the negatives still unfolding, the short-term outlook for the oil palm plantation sector remains dim, but we do not expect CPO prices to trade below RM2,000 per tonne for long,” it said in a report today.

“If prices stay low for an extended period, we may see cutbacks in plantation upkeep, including fertilisation, as well as increases in replanting activities and a slowdown in new plantings.

Affin forecasted CPO prices to range between RM2,100 to RM2,300 in the fourth quarter of 2014, with full year price averaging at RM2,400 — below the bank’s initial expectation of RM2,700 per tonne.

“Based on the still-tight global stock-usage ratio of 13.4% for the eight major oils in 2014/15 and further progress in biodiesel adoption in Malaysia and Indonesia, we expect firmer prices in 2015/16,” the report stated.

“However, with prices likely to start 2015 at around RM2,300 per tonne, our previous 2015 to 2016 CPO price assumption of RM2,850 per tonne looks ambitious.

“Hence, we cut our CPO price assumption to RM2,600 per tonne in 2015, and RM2,700 per tonne in 2016 and 2017.”

Affin attributed the downward trend in CPO prices to projected record-high US soybean production; weak palm oil exports growth as China, United States and Pakistan imported considerably less palm oil stocks; the slow progress in fulfilling the biodiesel mandate in Malaysia and Indonesia; reduced chances of strong El Nino event; and tight credit faced by Chinese importers, due to tighter loan requirements imposed by Chinese banks.

Despite this, the bank stated that the long-term outlook for the palm oil sector remains bright, due to compliance with the stock-usage ratio for major vegetable oils, growing world population and limited land availability for oil palm expansion.

Affin listed IJM Plantations Bhd, Kuala Lumpur Kepong Bhd and Sime Darby Bhd, as top picks in the sector.