14/08/2012 (Jakarta Post) - The Palm Oil Refiners Association of Malaysia and Malaysian Estate Owners’ Association — representing both upstream and downstream stakeholders — suggest that the government should lower the current 23 percent crude palm oil tax to 8 percent instead of increasing the duty-free CPO export quota.

This proposal is seen as a win-win solution to the present palm oil dilemma.

Recently, the Plantation Industries and Commodities Ministry announced the export of another two million metric tons of duty-free CPO by the end of next month — a move that many refiners see as throwing good money after bad.

This is because this decision will result in the government forgoing some 4 billion rinngit ($1.2 billion) in tax collection by allowing the export of up to 5.5 million tons of duty-free CPO.

On Thursday, a refiner and the MEOA expressed their consensus to stem the losses and solve the current dilemma.

As palm oil prices continued to fall in the last four months, the refiner said it was naive to assume that by pushing palm oil exports, stock levels would come down and this would prompt palm oil prices to jump.

“Stock management is one thing, but there’s also the strengthening of the US dollar,” said the refiner, who spoke on condition of anonymity.

“Does the government think they can really push prices up by pushing CPO exports?” he asked. He highlighted that a stronger US dollar was believed to have been hammering commodity prices, from energy to agricultural products.

A stronger greenback makes commodities like palm oil more expensive to investors. When buyers have to pay more, the demand for palm oil decreases and that forces the prices to come down.

It is time the government takes a more discerning approach, he said.

The refiner suggested that by mirroring the tax margin between Indonesia’s CPO and refined palm oil, Malaysia’s refiners could at least stand a chance of competing based on existing infrastructure and plant efficiency.

“Let’s say the tax gap between crude and refined oil in Indonesia is 8 percent, Malaysia’s CPO tax can be lowered to match that gap of 8 percent from the current 23 percent,” he said. This, he added, would allow oleochemical, specialty fats, producers here buy crude palm kernel oil at competitive prices from refiners.

MEOA president Boon Weng Siew concurred with the refiner.

“When CPO tax is lowered from 23 percent to 8 percent, it will still be reasonable for our local boys to ship out CPO to their overseas refineries. We don’t need to have that duty-free CPO export quota then,” he said.

Boon added that the government should do away with the current punitive windfall tax and have the proceeds of the 8 percent CPO tax to subsidize cooking oil instead.

“Poram, Malaysian Palm Oil Association and ourselves are getting together to work out a pricing formula for growers to ensure fair supply of CPO to the independent refiners, so as to mitigate the impact caused by the Indonesian palm oil tax restructure,” he said.

Boon noted that palm oil prices had been on a four-month downward trend. In the last two weeks, they dipped below the “feel-good” psychological level of 3,000 ringgit per ton again.

On Thursday, the third month benchmark CPO futures on Bursa Malaysia Derivatives Exchange traded 2 ringgit higher to close at 2,865 ringgit per ton.

The downturn in palm oil prices can be attributed to the restructuring of Indonesia palm oil taxes to attract downstream investments.

Since August 2011, the Indonesian government widened the tax gap between crude and refined palm oil. This made CPO and crude palm kernel oil very cheap for downstream businesses there. On top of that, processed palm oil in the form of cooking oil, soaps and detergents shipped out from Indonesian shores are tax free.

The tax restructure bumped up Indonesia’s annual refining capacity to 23 million tons. By the end of 2013, another 12 million tons is expected to come onstream, bringing the total annual capacity to 35 million tons. Boon said that while refiners in Indonesia were laughing all the way to the bank, those in Malaysia were bleeding red ink.

As Indonesia has widened the tax gap between crude and refined palm oil, refiners in Malaysia like Wilmar Group, Mewah Group, IOI Corp., Kuala Lumpur Kepong, Sime Darby and Felda Group have begun to lose money.

The wider the tax margin between crude and refined palm oil in Indonesia, the more pain is inflicted on refiners in Malaysia.