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Moody's positive on Malaysia's palm oil tax reduction

Publication Date : 19-10-2012

 

Malaysia’s reduction of palm oil tax is seen as a positive move, according to rating agency Moody’s Investor Service.

Malaysia announced long-awaited rate reductions in its crude palm oil (CPO) export tax On October 12.

The reduced rates take effect in January 2013 and counter the changes that Indonesia made to its CPO tax arrangements in October 2011, which Moody’s views as credit positive for the domestic industry.

“Until the new rates go into effect, we expect downward price pressure on CPO as storage capacity fills and forces stockpile sales.

“We expect market conditions to return to normal by mid-2013,” said Moody’s.

Indonesia changed its CPO export taxes in 2011, trimming the top rate on CPO to 22.5 per cent from 25 per cent and moved the nil tax threshold to US$750 (2,325 ringgit) per tonne from $700 (2,170 ringgit) per tonne.

“More importantly, in a desire to stimulate domestic, downstream value addition, the tax rate on refined products was broadly halved, cutting the top rate for refined palm oil (RBDPO) to 10 per cent from 23 per cent,” said Moody’s.

Moody’s said from January 2013, Malaysia’s tax rate on CPO exports will be 4.5 per cent to 8.5 per cent of the price, down from its current rate of 22 per cent to 23 per cent of the price.

“Malaysia has no tax on exports of processed palm oil.

“At the same time, the annual tax-free export allowance of CPO (increased to 5.5 million tonnes in 2012) will be removed,” said Moody’s.

The rating agency added that since refined palm oil exports were untaxed, the new tax regime narrows the difference in Malaysia’s export tax between CPO and refined palm oil to the new CPO tax rate, 4.5 per cent to 8.5 per cent.

“Assuming that the domestic CPO price equals the exported CPO price net of the export tax, domestic refining is encouraged by a larger tax differential.

“The tax differential will now be around 300 basis points greater in Indonesia than Malaysia, thus encouraging great refining in Indonesia.

“With Indonesia’s CPO tax of 10.5 per cent and refined palm oil tax of 2 per cent, the difference in tax rates is 8.5 per cent. With Malaysia’s CPO tax at 5.5 per cent and no refined palm oil tax, the difference in tax rates is 5.5 per cent.

“While the refining tax advantage remains with Indonesia, some customers, for the cost of a few dollars, prefer to deal with the more established Malaysian refiners, which may also provide logistical benefits and savings such as shorter shipping distances,” said Moody’s.

Moody’s said the Malaysian palm oil sector has had a tough year. Changes to Indonesia’s palm oil export tax regime immediately put Malaysian downstream processors at a disadvantage to their Indonesian counterparts.

This pressure, coupled with lower demand from Europe, led to reduced plant utilization and negative refining margins for some Malaysian processors, such as Felda and Sime Darby Bhd.

“We expect Malaysia’s output of palm oil in 2012 to reach 18.4 million tonnes. Peak production of palm oil usually occurs between June and October, but owing to the lower CPO prices so far this year, stock levels in Malaysia have been running at higher levels than usual.

“Stocks of all palm oil products climbed to a record 2.45 million tonnes at the end of September from 2.11 million tonnes a month earlier. Domestic storage capacity is 5.2 million tonnes, but the raw product has a comparatively short shelf life, making the inventory growth a risk,” the ratings agency said.

 

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