India's Import Taxes Raise to Hit Indonesia, M'sian Oil Refiners

The research unit also pointed out that the levies could make CPO imports more competitive versus processed palm oil, resulting in higher imports of the former to India. "Players that will benefit include all the upstream producers as this will boost demand for CPO over refined palm products from India.

"Refiners like Mewah and Wilmar's refineries in Malaysia and Indonesia could face stiffer competition from India's refiners and this could crimp their refining margins."

Maybank IB Research reckons the situation could pressure Malaysian policymakers to revisit the current export tax structure as palm oil inventory is expected to pile up in the upcoming seasonally high production months.

"The change further dilutes the competitiveness of Malaysian refined palm oil while Indonesia's refiners' margins could be compressed (for sale to India).

"Malaysia imposes a high export duty on CPO of 23 per cent and consequently, the bulk of its CPO production flows downstream to its refineries. However, there is an over-capacity of refineries in Malaysia, and margins are already negative for some," it said in a client note.

The brokerage sees two options for policymakers - they could either increase the quota for duty-free CPO exports as an interim measure on top of the approximately three million tonnes awarded earlier this year, or reduce Malaysia's high export duty tax on CPO to a maximum tax rate of 10 per cent from 23 per cent now to mirror Indonesia's tax differential between refined and crude palm oil.

Maybank IB Research is cognizant, however, that a larger quota of duty-free CPO exports may irk refiners, while revamping Malaysia's export tax structure now could prove unpopular coming just ahead of the national polls.

"After all, 39 per cent of Malaysia's oil palm planted areas are owned by smallholders and government agencies, while the bulk of Malaysia's refining capacity are owned by the large listed entities."

It added that as policy makers continued to deliberate, market forces are "taking their own course", with millers in Sabah and Sarawak sharing the burden of refiners by giving them discounts in the first half of 2012.

"And effective July, we understand Wilmar (Malaysia's largest refiner with a capacity of some five million tons) has discontinued all forward purchases agreements in Malaysia, opting for spot purchases.

"We believe this will give Wilmar stronger bargaining position to demand for even higher discounts especially when CPO tanks (of millers) "overflow" in the coming months.

"Should this happen, purer Malaysian upstream players will suffer' from lower revenue as a result of heavy discounting (vis-vis CPO spot prices) to clear their CPO stocks."