In what is widely seen as a belated response to the fiscal incentives granted by the world’s largest palm oil producer, Indonesia, to promote refined oils export, Malaysia has decided to do away with tax-free quotas for crude palm oil and introduce a new export tax structure that is set to take effect from January 1.

Export taxes are to be between 4.5 and 8.5 per cent on a sliding scale; but details of slabs on which the tax rates will be applied are not known as yet.

What is clear is that the tax rates will be reviewed and changed every month similar to what Indonesia does.

Withdrawal of tax-free export quota for crude palm oil (CPO) and imposition of export tax will surely hurt pure upstream producers such as plantation companies who produce and market CPO.

CPO exports, which were hitherto tax-free, will now be taxed, a move that will further erode their already blunt competitive edge.

“The price realisation of pure upstream companies will drop by 4.5-8.5 per cent as local prices can be expected to adjust for thee taxes,” commented an expert. On paper, the new export tax regime should be positive for Malaysian refiners; but on the ground, it is more of a consolation than anything else.

Given the proposed tax rates, they will certainly not be better off than Indonesian refiners who gain between 7.5 and 12.5 per cent from export tax differentials with higher gains at higher prices.

Clearly, the gains for Malaysian refiners would be much less, in the 4.5-8.5 per cent range. It is becoming increasingly clear that Malaysia’s new tax regime is more of a palliative to the domestic industry than a fiercely competitive response to Indonesia’s robust fiscal incentives to promote export of refined products.

Inventory

CPO prices in recent weeks have tanked following accretion of burdensome inventory.

At the turn of the year, Malaysian stocks could rise to three million tonnes.

Aggregate palm oil inventory in Indonesia and Malaysia combined is set to rise to unprecedented levels and could well test the 10-million-tonne mark. The effect on prices can well be imagined. It is likely that Indonesia will respond to the latest Malaysian move which can exacerbate the fragile situation.

Dumping ground

With rising inventory and falling prices at the origin, India is sure to become a dumping ground for palm oil. It is well known that a significant part of our imports are ‘stock transfer’ from the origin to the destination.

Some Indian companies are willing accomplices in this stock transfer business. Surely, strict monitoring or regulatory oversight is necessary to curb excessive imports. Imposition of customs duty will hardly serve the purpose.

The global growth signals are weak. And there is the imminent possibility of a strong rebound in production in 2013, not only of palm oil but oilseeds as well. The world vegetable oil market is moving to a situation of clear surplus.

Therefore, rather than enter, speculative capital is exiting from many agricultural markets; 2013 is most likely to be a ‘bear market for palm oil’.

Indonesia and Malaysia will engage in a slugfest. Good for consumers around the world after long years.

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