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Win-win solution to palm oil dilemma?

KUALA LUMPUR: Palm Oil Refiners Association of Malaysia (Poram) and Malaysian Estate Owners’ Association (MEOA) – representing both upstream and downstream stakeholders – suggest that the government lowers the current 23 per cent crude palm oil tax (CPO) to 8 per cent instead of increasing duty free CPO export quota.

This proposal is seen as a win-win solution to the present palm oil dilemma.

Recently, the Plantation Industries and Commodities Ministry announced the export of another two million tonnes of duty-free CPO by the end of next month – a move that many refiners see as throwing good money after bad.

This is because this decision will result in the government forgoing some RM4 billion in tax collection by allowing the export of up to 5.5 million tonnes of duty-free CPO.

In separate interviews with Business Times yesterday, a refiner and MEOA expressed their consensus to stem the losses and solve the current dilemma. As palm oil prices continue to fall in the last four months, the refiner said it is naive to assume that by pushing palm oil exports, stock levels will come down and this would prompt palm oil prices to jump. 

“Stock management is one thing, but there’s also the strengthening of the US dollar,” a refiner spoke on condition of anonymity. Does the government think they can really push prices up by pushing CPO exports?” he questioned.

He highlighted that a stronger US dollar is believed to have been hammering commodity prices, from energy to agricultural products. A stronger greenback makes commodities like palm oil more expensive to investors. When buyers have to pay more, the demand for palm oil decreases and that forces the prices to come down.

It is time the government take a more discerning approach.

The refiner suggested that by mirroring the tax margin between Indonesia’s CPO and refined palm oil, Malaysia’s refiners can at least stand a chance to compete based on existing infrastructure and plant efficiency.

“Let’s say the tax gap between crude and refined oil in Indonesia is 8 per cent, Malaysia’s CPO tax can be lowered to match that gap of 8 per cent from the current 23 per cent,” he said, adding this will allow oleochemical, specialty fats producers here buy crude palm kernel oil at competitive prices from refiners.

MEOA president Boon Weng Siew concurred with the refiner.

“When CPO tax is lowered from 23 per cent to 8 per cent, it will still be reasonable for our local boys to ship out CPO to their overseas refineries. We don’t need to have that duty-free CPO export quota then,” Boon said. 

He added that the government should do away with the current punitive windfall tax and have the proceeds of the 8 per cent CPO tax to subsidise cooking oil instead.

“Poram, Malaysian Palm Oil Association (MPOA) and ourselves are getting together to work out a pricing formula for growers to ensure fair supply of CPO to the independent refiners, so as to mitigate the impact caused by the Indonesian palm oil tax restructure,” he added.

Boon noted that palm oil prices have been on a four-month downtrend. In the last three weeks, it dipped below the “feel-good” psychological level of RM3,000 per tonne again. Yesterday, the third month benchmark CPO futures on Bursa Malaysia Derivatives Exchange traded RM2 higher to close at RM2,865 a tonne.

The downtrend in palm oil prices can be attributed to the restructuring of Indonesian palm oil taxes to attract downstream investments. 

Since August 2011, the Indonesian government widened the tax gap between crude and refined palm oil. This made CPO and crude palm kernel oil very cheap for downstream businesses there. On top of that, processed palm oil in the form of cooking oil, soaps and detergents shipped out from Indonesian shores are tax free.

The tax restructure bumped up Indonesia’s annual refining capacity to 23 million tonnes. By the end of 2013, another 12 million tonnes is expected to come onstream, bringing the total annual capacity to 35 million tonnes.

While refiners in Indonesia are laughing all the way to the bank, those in Malaysia are bleeding red ink.

As Indonesia widened the tax gap between crude and refined palm oil, refiners in Malaysia like Wilmar Group, Mewah Group, IOI Corp, Kuala Lumpur Kepong, Sime Darby and Felda Group began to lose money. The wider the tax margin between crude and refined palm oil in Indonesia, the more pain is inflicted on refiners here.

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