THE BUZZ  
 Malaysia's Plantation Industries and Commodities Minister Tan Sri Bernard Dompok will present  a  proposal  to  the  cabinet  tomorrow  to  cut  CPO  export  taxes  from  the  current 23%  to  8%-10%.  Dompok  will  also  ask  for  companies  with  unutilized  tax-free  export quotas to surrender those to other companies that are able to export CPO.

OUR TAKE  
 We believe the move will be positive for the palm oil price as it makes the export of CPO less prohibitively expensive. Upstream players now have an alternative to ship CPO by themselves, as a last option, if they are unable to sell to refiners.  However, contrary to what was said by the minister, we do not think the move addresses the issues faced by downstream  players,  which  centre  around  uncompetitiveness  against  Indonesian refiners.

For  Malaysian  refiners  to  match  their  Indonesian  counterparts' price competitiveness, two key elements need to be present:
i.  The differential between CPO's and refined products' export duties needs to be closer  to Indonesia's.  In  the  current  scenario,  the  Malaysian  government  is reducing the differential, but it is still less than Indonesia's 13.5%. ii.  Indonesian  refineries'  competitive  advantage  comes  from  their  ability  to  buy CPO  cheaper  due  to  the  domestic  price  being  adjusted down  by  the  quantum of  their  CPO  export  duty.  With  this  cut  in  the  CPO  export  tax,  Malaysian refiners  are  still  buying  raw  material  at  the  same  price  as  before,  hence  no more competitive.

The reallocation of unutilized tax-free CPO export quota is highly positive. It does appear that  some  quota  was  given  to  parties  who  were  not  able  to  shift  inventory,  so  this reallocation  will  help  to  reduce  excess  CPO.  According  to  the  minister,  there  is  still  a quota of about 2.5m tonnes of CPO to be used up. If  there is demand, Malaysia's CPO inventory of 1.2m tonnes could be dramatically reduced. Maintain OVERWEIGHT on the sector. 

 Source: OSK