Agribusiness sector

6 May 2019 (The Edge Markets MY) Maintain neutral: Malaysia has agreed to place a tax-free exemption on crude palm oil (CPO) from May 1 to Dec 31, 2019. Currently, CPO exports from Malaysia enjoy zero export tax as the CPO price is below RM2,250 per tonne. The move is expected to encourage CPO exports to African countries, Middle Eastern nations, and Russia, all of which are interested in buying Malaysian CPO.

 
The decision to suspend export duties on CPO for the rest of the year was a surprise to us, timing-wise, but not totally unexpected. This is because revising the CPO export duty would be among measures that could be taken to ensure the price competitiveness of Malaysian CPO. The move also comes after Indonesia eased its rules on palm oil levies in December 2018 to make its palm oil exports more competitive.

We view Malaysia’s move as supportive of CPO prices in view of its high palm oil stock of 2.92 million tonnes as at end-March 2019. The decision to suspend the CPO export tax will help keep Malaysian palm oil competitive to raise exports and lower stockpile ahead of the peak production season for palm oil in second half 2019 (2H19) to avoid a repeat of the sharp drop in CPO prices in fourth quarter of 2018 (4Q18).

However, this move is not likely to have any impact on CPO prices in the near term as Malaysia’s CPO export tax has been stuck at zero level since September 2018, as monthly average CPO prices continue to stay below RM2,250 per tonne.

The slower-than-expected drawdown in Malaysian palm inventory, coupled with projection of high global oil seed production have depressed CPO prices recently. We keep our “neutral” rating and average CPO price of RM2,400 per tonne, but could revisit our price outlook if stocks remain stubbornly high in 2Q19. — CGSCIMB, May 2