Malaysia Plans Steps to Counter Indonesia Palm Oil Tax Cut

Malaysia, the world's second-largest palm oil producer, will take steps to help local refiners stay competitive after Indonesia cut export taxes to boost shipments.

Minister of Plantation Industries & Commodities Bernard Dompok will soon present a plan to the government that will include changes in tax structure on palm oil, he told a press conference in Mumbai today, without elaborating.

Indonesia, the world's largest producer, reduced taxes in October to boost exports of processed oil, increasing competition for refiners in Malaysia. Shipments of refined palm oil may rise this year to benefit from the lower taxes, Sahat Sinaga, second deputy chairman of the Indonesian Palm Oil Board, said May 28.

"This is certainly a big challenge for refiners in Malaysia and India," Dompok said. "We are trying to see a balance between growers and refiners" and make Malaysia competitive in the world market, he said.

Indonesia cut maximum export duties on refined, bleached and deodorized palm oil to 10 percent from 23 percent. The rate for RBD palm olein was reduced to 13 percent from 25 percent, while the highest tax for crude palm-oil exports was set at 22.5 percent. Companies are increasing refining capacity in Indonesia to benefit from lower taxes, Adrian Foulger, head of food & beverage research at Standard Chartered Plc, said May 8.

Malaysia and Indonesia account for about 89 percent of the oil's global shipments.

'Mimic Indonesians'
"The only way forward is to mimic the Indonesians to some extent, it doesn't have to be exactly the same," Ivy Ng, an analyst with CIMB Group Holdings Bhd. (CIMB), said by phone from Kuala Lumpur today. "The Malaysian refiners should get a cost advantage of feedstock similar to that currently being enjoyed by the Indonesian refiners so that they can compete on the same level playing field."

Malaysia may consider cutting the export tax on crude palm oil and abolish a quota for tax-free exports of as much as 3.5 million tons annually, said Ng. The export duty for crude palm oil is about 21 to 22 percent, according to the Palm Oil Refiners Association of Malaysia.

India, the world's biggest palm oil buyer, may raise the benchmark import price of refined palm oil, unchanged since 2006, to protect refiners from a surge in imports, a government official said May 28. Refined oils are taxed at 7.5 percent, while there's no tax on crude oils.

Prices Fall
The August-delivery contract on the Malaysia Derivatives Exchange fell as much as 1.7 percent to 2,952 ringgit ($933) a ton and was at 2,961 ringgit at 2:33 p.m. in Mumbai.

Malaysia needs to focus on improving palm oil productivity and technology as there was limited land for plantations, said Dompok. The country is "approaching the limits" of arable land for oil palms, Abah Ofon, a Singapore-based agriculture analyst at Standard Chartered, said May 8.

Production may total 19 million tons this year as harvest is poised to rebound in the second half, Choo Yuen May, director-general of Malaysian Palm Oil Board, said in an interview. Output typically peaks between July and October.