THE Ministry of Plantation Industries and Commodities (MPIC) is understood to be looking into extending the exemption of export duty on crude palm oil for November and December. Industry sources say the ministry is preparing a paper to justify the extension to be presented to the Cabinet.
When contacted, a ministry official says he could neither confirm nor deny that the tax exemption will be extended beyond October.
Earlier this month, on Sept 4, Minister Datuk Amar Douglas Uggah Embas announced that effective Sept 1, CPO exporters were exempted from export duty until October. This is part of the government’s efforts to mitigate declining CPO prices by bringing down the stocks of the commodity in the country.
Earlier, the CPO export duty for this month had been gazetted at 4.5%, based on the average prices over 30 days in the previous two months.
“We understand that the ministry is preparing a justification for extending the exemption,” says an industry player from the refining sector, adding however that he is unaware what the justification might be.
CPO stocks rose to a 17-month high of 2.05 million tonnes in August, rising 23% from the previous month due to higher than expected production of fresh fruit bunches (FFB). In August, FFB production rose 22% to a monthly high of 2.03 million tonnes.
The low CPO price and high inventory led to the government’s move to exempt export duty on the commodity for September and October.
The minister said the exemption from duties is expected to raise palm oil exports by 600,000 tonnes over the two months and reduce stock levels to 1.6 million tonnes by the end of the year.
The tax exemption, if extended, should be positive for CPO prices. Since the announcement by the ministry on Sept 4, prices have improved, with the third month benchmark rebounding from its year-low of RM1,926 on Aug 29 to last Friday’s close of RM2,111 per tonne.
However, the exemption is expected to have a negative impact on palm oil refiners, more so the independent ones than the integrated players as they lose their competitiveness to their Indonesian counterparts with more oil leaving the country. Malaysia has more refining capacity than the CPO it produces. Last year, Malaysian oil palm estates produced 19.2 million tonnes of CPO compared to refining capacity of around 26 million tonnes, which works out to a utilisation rate of about 74% if all the oil were refined locally.
According to industry sources, local refineries need to achieve a utilisation rate of at least 60% to stay in business as margins dip into the red below this level. On average, up to August this year, Malaysian refineries achieved a utilisation rate of around 64%, those in the industry say.
When contacted, integrated plantation player Sime Darby Bhd says its refineries have yet to be negatively impacted by the tax exemption on CPO export for September as stock levels are still high.
“In the next few weeks however, as the CPO stock decreases, it will eventually affect our refineries,” says its spokesperson.
Sime Darby has refining capacity of 1.5 million tonnes per year in Malaysia compared with its CPO production of 1.4 million tonnes in its fiscal year to June 2013.
“We rely on third-party suppliers in locations where there is insufficient CPO supply,” the spokesperson says, adding that Sime Darby does not have a tax-free export quota.
The government scrapped the tax-free quota in 2013 when it implemented a new tax structure for CPO exports.
The situation may not be all bleak for local refiners, however, if Indonesia follows suit by slashing its export tax to zero for October. If international CPO prices fall below US$750 per tonne, the Indonesian export tax will be automatically cut to zero.
The CPO price in Indonesia was US$730 last Friday.
For September, Indonesia has set the CPO export tax at 9%. The monthly rate is set using both global and local CPO prices on the first 20 days of the previous month.
“Based on the current CPO export price, on CIF Rotterdam basis, I won’t be surprised if Indonesia announces zero tax for CPO in October. In fact, the industry is already expecting it,” says the industry player.
He adds that if Indonesia follows suit in announcing zero CPO export tax in October, it will be a level playing field for Malaysia, which will be positive for local refiners.
“In fact, if Indonesia announces the zero CPO export tax in November and December 2014, it will also be good for our local refiners,” he says.
CPO inventory in Indonesia, the world’s largest producer, may have surged to a 15-month high in August due to rising production and reduced demand from importers. Inventories jumped 24% to 2.5 million tonnes from 2.02 million tonnes in July, according to a survey by Bloomberg.
This article first appeared in The Edge Malaysia Weekly, on September 22-28, 2014.