Export tax freeze to support palm oil industry
January 8, the government suspended export taxes on crude palm oil (CPO) for three months, a move Plantation Industries and Commodities Minister Datuk Seri Mah Siew Keong described as a short-term, preemptive step to increase the product’s competitiveness in global markets.
Export duties are imposed on all palm oil exports above RM2,250 per tonne at a rate determined by a monthly reference price. The January reference price saw the tax at around 5.5 per cent.
Suspension of the duty will save CPO exporters around US$36 (RM140.32) per tonne for shipped products, according to the Plantation Industries and Commodities Ministry, and increase Malaysia’s competitiveness on the global markets.
The country is the world’s second-largest palm oil producer after Indonesia, whose CPO exports are subject to a US$50-pertonne levy.
Sales could be boosted by up to 15 per cent over the period, according to some analysts, and could also benefit from seasonal upswings in demand from key
Easing stockpile pressures
In tandem with increasing export competitiveness and sales, the measure also aims to reduce stockpiles of palm oil, an issue that has weighed on the industry in recent times.
Palm oil stocks in storage reached two-year highs at the end of December, rising by 59 per cent year-on-year (y-o-y) to 2.7 million tonnes, according to the Malaysian Palm Oil Council.
The build-up was largely attributed to good harvests and an increase in imports last year, rather than a slump in sales. In fact, exports over the first 11 months rose by 2.4 per cent, despite a tapering off of activity late in the year.
The export tax holiday, which was scheduled to end on April 7, could be brought forward if stockpiles were reduced to around 1.6 million tonnes, said the government, though production forecasts indicated that output from the country’s processing plants would continue to top up reserves in the months to come.
The high inventory level has weighed on commodity prices, which dropped by about 20 per cent over the course of last year, subsequently affecting earnings.
The tax measures had a positive effect on palm oil futures on the Bursa Malaysia Derivatives Exchange, with benchmark contract prices for March delivery edging up 1.2 per cent on the day the tax break was announced, though it is unclear whether the raised pricing level will be sustained.
While futures prices on China’s Dalian Commodity Exchange also jumped early last month, they dipped again shortly after on the back of a stronger ringgit.
The appreciation of the ringgit has been another factor affecting the palm oil industry in recent times, and one that could erode some of the advantages sought by the government’s tax suspension.
The ringgit was trading at RM4 to US$1 last month — its best level since August 2016.
Given that CPO is traded in the local currency, a stronger ringgit generally makes products more expensive for foreign buyers and affects demand, with the government expecting a 10 per cent reduction in earnings for the country’s palm oil exporters this year as a result.
In addition, India — Malaysia’s biggest export market — increased import duties on both crude and refined palm oil in November.
While the levy hikes, which have risen from 15 per cent to 30 per cent for CPO and 25 per cent to 40 per cent for refined palm oil, are aimed at supporting domestic edible oil producers in India, they have coincided with a sharp fall in Malaysian palm oil shipments to that country. Indeed, exports to India dropped by 28.4 per cent last year.
There are concerns that any improvement in commodity prices could be undercut by the higher import levy in India, which could serve as a disincentive for buyers.
Suspension of the duty will save CPO exporters around US$36 per tonne for shipped products... and increase Malaysia’s competitiveness on the global markets.