18/02/2013 (The Star) - Local processors of crude palm kernel oil (CPKO) are facing a big dilemma, no thanks to the export tax treatment on it.

Government initiatives such as abolishing the duty-free CPKO quota while concurrently reducing the CPKO export duty with a variable structure would be of help, concur processors.

The processors are also seeking for a removal of the 5% export duty on refined, bleached and deodorised (RBD) palm kernel oil (PKO).

Palm Oil Refiners Association of Malaysia chief executive officer Mohammad Jaaffar Ahmad said that over the years, players such as IOI Loders Croklaan, Cargill, Sime Darby Kempas, ISF, Fuji Oil and Premium Vegetable Oils had invested over US$200mil (RM618.85mil) in the CPKO segment for capacity increase, research and development (R&D), and innovation capabilities.

Based on the current 10% export tax on CPKO and the duty-free CPKO export quota, he told StarBiz that “CPKO processors are facing tougher times due to uncompetitive pricing, slower recovery in investments for setting up manufacturing and R&D centres, and also the flight of investments from Malaysia to Indonesia.

“Many CPKO processors claim they are unable to realise the tax benefits on feedstock prices due to the duty-free CPKO export quota awarded to only selected few companies in Malaysia,” he said.

According to Jaaffar, the interest of local CPKO processors must be protected because “it is the only sub-sector of the local palm oil industry that has a competitive advantage over Indonesia, another big CPKO player”.

To recap, local crude palm oil (CPO) processors were saddled with a similar problem not too long ago, but the implementation of the new CPO export tax and the abolishment of the duty-free CPO export quota early this year helped, enabling many CPO processors to move ahead with their strategies in the process.

The new Malaysia CPO export tax saw the Indonesian players reaping about a 1.5% tax benefit over their Malaysian peers compared with 6% to 10% previously, thus providing a better playing field. Hence, Jaaffar said, it would also be timely for the Government to consider the proposals by the CPKO processors.

The Indonesian CPKO processors currently enjoy a benefit of RM195 per tonne (US$63 per tonne) on average over local CPKO processors.

He pointed out that the uncompetitive pricing of Malaysian CPKO players had led to a “loss of customers/business”, reflected in Malaysia's export of CPKO-based products falling by 10% between January and October 2012 as opposed to the same period in 2011.

The CPKO processors also claim that they suffered a loss in total revenue of RM323mil (US$105mil) based on the average price of CPKO of RM3,414 per tonne and a loss in volume of 94,689 tonnes. The volume loss is derived from annualised Malaysian Palm Oil Board figures for exported processed palm oil products in 2011 and 2012.

In addition, this has also resulted in the loss of corporate tax revenues of up to RM80mil (US$26mil) for the Malaysian exchequer in 2012.

According to Jaaffar, another looming scenario is that more investments in CPKO processing would move to Indonesia, as investors are finding it tough to recover their investments and make sustainable profits in Malaysia.

“This flight of investment in the research-driven sub-segment of palm oil will also translate into the flight of highly-skilled labour from Malaysia to Indonesia and loss of jobs for the locals here,” he added.

On the 5% export duty on RBD PKO, the duty was initially imposed as Malaysia wanted to keep it for the downstream activities here.

However, according to Jaafar, over the years, Malaysia produced more RBD PKO than the local demand, and due to the changes in the Indonesian export duty in September 2011, the competitiveness of RBD PKO was eroded.

“Now, there is a need for the removal of the 5% export duty on RBD PKO for our exporters to compete with the Indonesians,” he said.

In 2012, a total of 258,640 tonnes of RBD PKO was exported, a significant drop of 40% from the 363,690 tonnes exported in 2011. Based on an average export price of RM3,673 (US$1,204.50) per tonne, the duty collected amounted to RM95mil.

What was important was adding value to CPKO in processing them to various processed palm kernel oils, Jaafar opined, adding that: “If we are not able to export our RBD PKO competitively, then there would be less demand for CPKO, which will ultimately lead to a lower price of CPKO.”

Therefore, the Government would need to help out by implementing a good policy decision to support the PKO processing industry to enhance its competitive edge.

The two-decade-old, export-oriented CPKO industry drives the innovation and creation of high-end modified products, which serve as important ingredients in the oleochemical, bakery, chocolate and confectionary, and bakery-related industries.