02/02/2012 (The Sun) - Pure palm oil planters such as Genting Plantations Bhd and Hap Seng Plantations Bhd could see rising earnings risk on possible lower selling crude palm oil (CPO) prices if plans to realign prices in Malaysia and Indonesia materialised, according to CIMB Research.

"A shift in policy to help the downstream players in Malaysia may be negative for the upstream players unless the government forks out tax rebates.'

Last September, Indonesia cut its export tax on refined palm oil and raise tariffs for CPO to boost its own local downstream activities.

This has made the Malaysian downstream players less competitive than Indonesian rivals which currently enjoy CPO feedstock costs that are cheaper than their Malaysian peers.

Reports on Monday suggested that Malaysia had delayed the issuance of tax-free export quota for CPO because it is reviewing options to help local downstream players counter increased competition from Indonesia.

The delay created more supply for local processors but comes at a time when demand for Malaysian refined oil has fallen due to cheaper Indonesian edible oil.

On the other hand, plantation owners holding export licences said the delay hampers their ability to supply overseas refiners with feedstock and meet export contracts.

Local planters with overseas refineries includes Sime Darby Bhd, IOI Corp Bhd and Kuala Lumpur Kepong Bhd.

Lack of cheap tax-free export supply means these refineries may have source feedstock from elsewhere, including from Indonesia. In 2011, Malaysia allocated 3.48 million tonnes - or 19% of total production – under tax-free quotas given to plantation firms.

Malaysia does not tax its processed oil shipments.

One of the proposed measures to help local refineries is to create a level CPO price in both Malaysian and Indonesia.

CIMB Research estimated local CPO price will drop between 3% to 5% if this happens.

It was estimated CPO prices in Indonesia is about 10% cheaper than in Malaysia. That works out to about RM300 a tonne, based on current market price of just above RM3,000 a tonne.

The firm said other possible measures being proposed to help the downstream sector includes a review the duty-free CPO export quota, realignment of tax rate to match the Indonesian structure, remove windfall tax and give tax rebates to the industry, or a ceiling price for CPO prices.

"As we think that the government is unlikely to fork out additional funds or subsidise the industry, the more likely measures are a review of the duty-free CPO export quota or realignment of the export tax structure to Indonesia's,'' it said.

Both these measures will not be popular with the upstream planters or players that currently enjoy the CPO tax-free quota as it may dent their earnings. However, it will help relieve the competitive pressure on the downstream players in Malaysia.

"The potential impact of this on the Malaysian planters cannot be worked out until the government decides on the details of the change, if any,'' the research firm said.

CIMB maintains its underweight rating for the sector.