- Reuters reported that Indonesia’s industry ministry is considering changes to the country’s palm oil export tax system to further promote downstream industries.

-  The Director General of Agricultural Industries said that with palm refining capacity in Indonesia set to jump by almost 50% to 45mil tonnes in 2014, the ministry is looking to offer tax breaks on high value-added palm products.

-  He added that after the assessment of the palm oil export tax structure is completed in May 2014, it will be discussed with other ministries such as trade and finance. He expects the new export tax structure to be imposed by next year.

-  According to the same article, there are doubts that the Director General’s proposal will go ahead as Indonesia is expected to hold its elections soon.

-  We view this development negatively as more tax incentives for the downstream industries in Indonesia would result in an unequal playing field for the Malaysian players. This would be similar to the situation before Malaysia implemented its export tax system in October 2012.

-  If Indonesia were to revise its tax system for the downstream players, we reckon that Malaysia would also follow suit. Also, there is a possibility that India would increase its import duty rate for refined palm oil to protect its local refiners.

-  Currently, Indonesia’s palm refiners have a small tax advantage of only RM50/tonne against their Malaysian counterparts.

-  For the month of May 2014, the export tax rates are 12% for crude palm oil and 5% for refined palm olein in Indonesia. In comparison, Malaysia’s export tax rate for crude palm oil is 5.5%.

-  In India, the import duty on refined palm oil is 10% versus 2.5% for crude palm oil.

-  In spite of the potential negative chain reaction from the proposed revision in Indonesia’s export tax structure, there is a reprieve for Malaysian downstream players. The proposal is likely to be delayed due to the upcoming presidential elections in Indonesia.

-  Hence, we believe that operating margins for palm refiners and oleochemical players in Malaysia are likely to hold up for now. Among the Malaysian companies, Kuala Lumpur Kepong (KLK) has palm refineries in Indonesia. Upon completion of its refinery in Dumai, KLK will have three refineries in Indonesia with total capacity of 1.26mil tonnes per year.

Source: AmeSecurities