MARKET DEVELOPMENT
Zero Duty for CPO Likely to Be Extended
Zero Duty for CPO Likely to Be Extended
05/01/2015 (The Star) - Palm oil refiners facing a margin squeeze from the recent imposition of the zero crude palm oil (CPO) export tax are bracing for an extension of the zero duty, which is expected to remain up till next month.
This is because the threshold price of RM2,250 per tonne for CPO to be taxed is not likely to be breached in the coming months, according to industry experts.
Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad told StarBiz that many palm oil refiners were experiencing negative margins, especially “when the zero CPO export duty was declared in Malaysia and Indonesia.”
Currently, the differential price of refined, bleached and deodorised (RBD) palm olein over CPO is around RM70 per tonne on average.
“Once you’ve factored in the refining and fractionation costs, this margin will disappear and go into negative territory. The margins have been bad for the last three to four months, and will continue to be so in the first quarter of this year if the CPO prices continue to be dampened and demand does not increase quickly,” explained Jaaffar.
He pointed out that Poram members were “resilient refiners”, and that although there were no reports of plant closures so far, “many are operating at below optimal capacity to cut losses”.
“While exports will not be halted, the composition of the product mix will change, as refiners will produce and export more products, which can command better margins, including CPO.”
According to Jaaffar, whenever there is zero CPO export duty in Malaysia, everybody loses, including the Government in terms of the collection of the CPO export duty.
Based on 2013’s average, Malaysia exported about 300,000 tonnes of CPO every month.
At the minimal threshold price of RM2,250 per tonne for CPO to be taxed, Jaaffar said, “The Government can collect about RM30mil.”
To date, the local palm oil refining industry is estimated to be worth RM2.9bil, with a total of 58 refineries operating in Malaysia, including the big plantation companies such as Wilmar International Ltd, Felda Global Ventures Holdings Bhd, Sime Darby Bhd, IOI Corp Bhd and Mewah Group.
“Generally, all refiners, whether integrated or pure, will be affected when there are zero or negative margins. Different refineries employ different strategies to mitigate their losses, but normally, pure refiners are the ones that will be badly hit, as they are fully dependent on the processed palm oil exports,” added Jaaffar.
For refiners, the impact of the zero CPO export duty in Malaysia should not be seen in isolation.
“This must be seen together with the Indonesian duty export structure. If there is zero CPO export duty declared by both countries, it means that there is no tax differential between the two countries.
“Malaysia will have no further advantage to export or sell processed palm oil (RBD palm oil and RBD palm olein), as Indonesia will not impose any duty on its processed palm oils either.” In Malaysia, all processed palm oils have no export duty.
On the other hand, if Malaysia imposed a 4.5% CPO export duty (because the threshold prices of RM2,250–RM2,400 have been breached), it would only be good if the Indonesians also imposed a CPO export duty correspondingly (assuming the Indonesian CPO threshold price has also increased in tandem with Malaysia and the international price).
Since the minimum Indonesian CPO export tax starts from 7.5% onwards, compared with Malaysia’s 4.5%, this means there will be a tax differential of 1% for RBD palm olein, favouring the Indonesian cost of production.
Jaaffar said “as long as the tax differential is kept between 1% and 3%, which translates to between US$10 and US$30 per tonne (with cost advantage to the Indonesians), Malaysian exporters can still compete with the Indonesians.”
However, he stressed that the moment the tax differential widens to more than 3%, there would no longer be a level playing field for Malaysia and it would be difficult for Malaysian exporters to compete with the Indonesians.
Jaaffar also said the refining sector has been manageable since the implementation of the new CPO export duty structure since January 2013. Refining is all about value addition and industrialisation.
“To pre-empt the market by declaring a zero CPO export duty well ahead of the gazetted threshold price is sending the wrong message to the world market,” he said, adding that the world did not need that much of CPO, nor could it buy more than what it wanted in advance.
Therefore, declaring a zero CPO export duty does not necessarily increase the demand for CPO worldwide.
This is because the threshold price of RM2,250 per tonne for CPO to be taxed is not likely to be breached in the coming months, according to industry experts.
Palm Oil Refiners Association of Malaysia (Poram) chief executive officer Mohammad Jaaffar Ahmad told StarBiz that many palm oil refiners were experiencing negative margins, especially “when the zero CPO export duty was declared in Malaysia and Indonesia.”
Currently, the differential price of refined, bleached and deodorised (RBD) palm olein over CPO is around RM70 per tonne on average.
“Once you’ve factored in the refining and fractionation costs, this margin will disappear and go into negative territory. The margins have been bad for the last three to four months, and will continue to be so in the first quarter of this year if the CPO prices continue to be dampened and demand does not increase quickly,” explained Jaaffar.
He pointed out that Poram members were “resilient refiners”, and that although there were no reports of plant closures so far, “many are operating at below optimal capacity to cut losses”.
“While exports will not be halted, the composition of the product mix will change, as refiners will produce and export more products, which can command better margins, including CPO.”
According to Jaaffar, whenever there is zero CPO export duty in Malaysia, everybody loses, including the Government in terms of the collection of the CPO export duty.
Based on 2013’s average, Malaysia exported about 300,000 tonnes of CPO every month.
At the minimal threshold price of RM2,250 per tonne for CPO to be taxed, Jaaffar said, “The Government can collect about RM30mil.”
To date, the local palm oil refining industry is estimated to be worth RM2.9bil, with a total of 58 refineries operating in Malaysia, including the big plantation companies such as Wilmar International Ltd, Felda Global Ventures Holdings Bhd, Sime Darby Bhd, IOI Corp Bhd and Mewah Group.
“Generally, all refiners, whether integrated or pure, will be affected when there are zero or negative margins. Different refineries employ different strategies to mitigate their losses, but normally, pure refiners are the ones that will be badly hit, as they are fully dependent on the processed palm oil exports,” added Jaaffar.
For refiners, the impact of the zero CPO export duty in Malaysia should not be seen in isolation.
“This must be seen together with the Indonesian duty export structure. If there is zero CPO export duty declared by both countries, it means that there is no tax differential between the two countries.
“Malaysia will have no further advantage to export or sell processed palm oil (RBD palm oil and RBD palm olein), as Indonesia will not impose any duty on its processed palm oils either.” In Malaysia, all processed palm oils have no export duty.
On the other hand, if Malaysia imposed a 4.5% CPO export duty (because the threshold prices of RM2,250–RM2,400 have been breached), it would only be good if the Indonesians also imposed a CPO export duty correspondingly (assuming the Indonesian CPO threshold price has also increased in tandem with Malaysia and the international price).
Since the minimum Indonesian CPO export tax starts from 7.5% onwards, compared with Malaysia’s 4.5%, this means there will be a tax differential of 1% for RBD palm olein, favouring the Indonesian cost of production.
Jaaffar said “as long as the tax differential is kept between 1% and 3%, which translates to between US$10 and US$30 per tonne (with cost advantage to the Indonesians), Malaysian exporters can still compete with the Indonesians.”
However, he stressed that the moment the tax differential widens to more than 3%, there would no longer be a level playing field for Malaysia and it would be difficult for Malaysian exporters to compete with the Indonesians.
Jaaffar also said the refining sector has been manageable since the implementation of the new CPO export duty structure since January 2013. Refining is all about value addition and industrialisation.
“To pre-empt the market by declaring a zero CPO export duty well ahead of the gazetted threshold price is sending the wrong message to the world market,” he said, adding that the world did not need that much of CPO, nor could it buy more than what it wanted in advance.
Therefore, declaring a zero CPO export duty does not necessarily increase the demand for CPO worldwide.