CPO- a technical rebound for now

Recently, the Plantation Industries and Commodities Minister Tan Sri Bernard Dompok proposed a reduction in the export duties on CPO, from 23% to 8-10%. (For more, go here) There are a few reasons why the Minister made this proposal, chief among them are:

1. In response to an Indonesian move to levy export duty of about 13% on CPO. This Indonesian move resulted in a cross subsidy by its upstream producers to its downstream players. As a result, Indonesian refined products are more competitive via-a-vis the refined products from independent Malaysian producers. 

You may ask how did the Malaysian producers fail to compete when they have an indirect subsidy of 23%. The answer is simply because they can't get their hands on Malaysian CPO as most of it is exported under duty-free exemption. Malaysian currently produces 19 million tonnes of CPO, of which 12 million tonnes are consumed by refiners, 2 million tonnes used as cooking oil and the balance of 5 million tonnes are exported. Before the Indonesian move, independent Malaysian refiners can import in CPO from Indonesia and they can compete with the Indonesian refiners. Today, Malaysian refineries are reported to be suffering a negative margin of USD30-40 per tonne. (For more go here).

2. With CPO trading at below RM2500 per tonne, the government will not receive any windfall tax from plantation companies. This tax will only come into effect if CPO is above RM2500. The rate is 15% of any amount above RM2500 per tonne.

So the proposal to collect a lower 8-10% export duty coupled with the termination of duty-free export will lead to an export duty collection of RM1.125 billion (calculated as follows: 5 mil tonnes multiplied  by RM2500 per tonne and multiplied by 9%). Compared to the windfall tax of RM1.425 billion collectible if CPO were trading at RM3000 per tonne (calculated as follows: 19 mil tonnes multiplied  by RM500 per tonne and multiplied by 15%).

The proposed export duties reduction & termination of duty-free export should appease the refiners but it would come at the expense of upstream players. Among these are big plantation companies and small estate owners. With the election around the corner- where every vote counts- I doubt the government would move on the proposal any time soon.

There are two paragraphs in the recent newspaper article that I like to highlight:

1. Dompok also said the ministry would work on an incentive programme to encourage replanting of about 100,000 hectares of oil palm trees that were more than 35 years old. “This incentive will cut off about 300,000 tonnes of CPO in the market when the replanting scheme is put in place” he said.  

2. “We will also take a look back at the country's biofuel programme and will expedite the B5 programme to B10, doubling the biodiesel content utilised by the Government's agencies vehicles,” he added

These two points highlight the problem of oversupply of CPO, which was the essence of my earlier post. As such, the proposed export duties reduction in my opinion would not have any impact on CPO price for the medium-term. The CPO prices will be determined by the market forces and the market is wrestling with lower prices brought on by higher CPO output.