-  According to Reuters, Indonesia is expected to cut its export tax on CPO to zero in October 2014. In September, export tax rates were 9% for CPO and 3% for refined palm olein. This gives Indonesian palm refiners a tax advantage of 6% or US$44/tonne (RM144/tonne) over their Malaysian peers.

-  Jakarta may also be looking at extensive action involving export taxes on refined products. Ministry officials are studying a change in the export tax structure to boost their downstream palm oil industry.

-  This is not surprising as refining capacity in Indonesia is expected to rise to 45mil tonnes in 2014F versus its forecasted CPO production of 27.5mil to 28mil tonnes.

-  We believe that Indonesia’s actions would not be positive for Malaysian players. Preferential tax rates for the Indonesian palm refiners would erode the competitiveness of Malaysian refiners further.

-  Zero tax for exports of Indonesia CPO would level the playing field between Indonesian and Malaysian upstream players. Based on PT Astra Agro Lestari’s latest auction, the price differential between CPO in Malaysia and Indonesia is RM73/tonne currently.

-  The export tax rate for CPO in Malaysia is zero each for September and October. The CPO export tax is zero in Malaysia if CPO price falls below RM2,250/tonne.

-  The developments in Malaysia and Indonesia may also trigger a reaction from the Indian palm refiners. Last year, the Indian refiners complained that buyers preferred to import refined palm oil instead of purchasing them domestically.

-  In response to Indonesia’s and Malaysia’s actions, the Indian refining industry may lobby to increase the import duty on refined palm products. Presently, the import tax rates are 10% for refined palm products and 2.5% for crude palm oil. The refiners were lobbying for an import tax rate of 12.5% last year.

-  Finally, buying of palm oil may be delayed as China and India wait for Indonesia to cut its export taxes.

-  Silver lining is that palm oil shipments from Malaysia have been positive in the 20 days of September. Two independent cargo surveyors reported that Malaysia’s palm oil exports rose by 21.2% and 26% compared with the same period in August. According to SGS, palm oil shipments to China climbed 121.7% while India imported 25.8% more palm oil.

Source: AmeSecurities