- Reuters has reported that Malaysia will increase the export quota for tax-free CPO by up to two million tonnes this year to help planters cope with higher output in the coming few months.
- Reuters cited a government official as saying that the government is doing this on a caseby-case basis for local firms since production is starting to rise in the second half of the year and exports are slow. We reckon that some of these local firms would include IOI Corporation and Sime Darby.
- The hike in the tax-free CPO export quota will increase this year's duty-free CPO export quota from 3.6mil tonnes to 5.6mil tonnes.
- We view this development positively as it would cushion any surge in palm oil inventory in Malaysia resulting from improvements in CPO production in 2H2012. In addition, it would also help support exports of palm oil in crude form to India, which recently revised its import tax structure.
- There are concerns that palm oil inventory in Malaysia would rise due to the weak demand in July. According to independent cargo surveyors, palm oil exports from Malaysia eased 14% to 19% in the 25 days of July compared to the same period in June.
- In spite of this, we reckon that demand will pick up, underpinned by the Mooncake Festival in September 2012.
- The huge price discount of 20% or US$233/tonne between CPO and soybean oil should also encourage importers in China to switch from soybean to palm oil.
- Since early this year, palm oil inventory in Malaysia has declined 17% from 2.06mil tonnes as at end-February to 1.7mil tonnes as at end-June.
- The increase in the duty-free CPO export quota would also help boost exports to India. The recent revision in India's tax structure has encouraged importers to buy more palm oil in crude form compared to refined form. India accounted for 13% of palm oil exports from Malaysia in the first six months of this year.
- We remain positive on the plantation sector. We believe that CPO prices would be supported by flat soybean ending inventory in the US in 2012F/2013F and the huge price disparity between CPO and soybean oil.