Tuesday July 24, 2012

India's higher taxes on imports of refined palm oil likely to hit incomes of M'sian refiners

PETALING JAYA: India's move to raise taxes on its imports of refined palm oil products is likely to put a dent in the earnings of Malaysian and Indonesian refiners of the commodity, analysts said.

The decision, however, is neutral for crude palm oil (CPO) producers as India's CPO imports remain duty-free.

India, the world's biggest importer of palm oil, effectively doubled import taxes last Thursday when it ended a six-year freeze on the base import price of processed palm olein, increasing the cost of imports from Malaysia and Indonesia.

The country currently imports close to half its edible oil needs, and palm oil takes pole position with a 43% share of the edible oil market.

Employees fill plastic bottles with edible oil at an oil refinery plant of Adani Wilmar Ltd, a leading edible oil maker, in Mundra, 375 km from the western Indian city of Ahmedabad. The new tax policy by India is aimed at placating disgruntled refiners in India, who were doubly hit by both the low tariff and cheaper processed palm oil products from Indonesia. — Reuters

The new tax policy, which lifts the base price of refined palm oil imports to market prices from US$484 (RM1,535) per tonne, is aimed at placating disgruntled refiners in India, who were doubly hit by both the low tariff and cheaper processed palm oil products from Indonesia.

Since Indonesia slashed its export taxes on refined palm oil last October, India's imports have doubled to 1.2 million tonnes for the first eight months of this year over 2011.

CPO futures closed lower yesterday at RM2,990.

Indonesia and Malaysia, the world's top two producers of palm oil, account for 90% of global output of some 50 million tonnes.

Indonesia supplies 74% of India's palm oil requirements while Malaysia makes up the balance 26%.

Malaysia exported 1.66 million tonnes of palm oil products, or 9% of its total exports, to India last year. In the first half of the year, Malaysia shipped 1.07 million tonnes there, which was 82% more than in the same period in 2011.

CIMB Research said in a client note that the higher tax was estimated to widen the margin advantage of palm oil refiners in India to 7.73% from 3.5%.

“This will allow them to compete better with the Indonesian refiners, which we estimate enjoy a profit margin of 5% to 10% due to the favourable export tax for refined palm products in Indonesia,” it said.

The research unit also pointed out that the levies could make CPO imports more competitive versus processed palm oil, resulting in higher imports of the former to India. “Players that will benefit include all the upstream producers as this will boost demand for CPO over refined palm products from India.

“Refiners like Mewah and Wilmar's refineries in Malaysia and Indonesia could face stiffer competition from India's refiners and this could crimp their refining margins.”

Maybank IB Research reckons the situation could pressure Malaysian policymakers to revisit the current export tax structure as palm oil inventory is expected to pile up in the upcoming seasonally high production months.

“The change further dilutes the competitiveness of Malaysian refined palm oil while Indonesia's refiners' margins could be compressed (for sale to India).

“Malaysia imposes a high export duty on CPO of 23% and consequently, the bulk of its CPO production flows downstream to its refineries. However, there is an over-capacity of refineries in Malaysia, and margins are already negative for some,” it said in a client note.

The brokerage sees two options for policymakers - they could either increase the quota for duty-free CPO exports as an interim measure on top of the approximately three million tonnes awarded earlier this year, or reduce Malaysia's high export duty tax on CPO to a maximum tax rate of 10% from 23% now to mirror Indonesia's tax differential between refined and crude palm oil.

Maybank IB Research is cognisant, however, that a larger quota of duty-free CPO exports may irk refiners, while revamping Malaysia's export tax structure now could prove unpopular coming just ahead of the national polls. “After all, 39% of Malaysia's oil palm planted areas are owned by smallholders and government agencies, while the bulk of Malaysia's refining capacity are owned by the large listed entities.”

It added that as policy makers continued to deliberate, market forces are “taking their own course”, with millers in Sabah and Sarawak sharing the burden of refiners by giving them discounts in the first half of 2012.

“And effective July, we understand Wilmar (Malaysia's largest refiner with a capacity of some five million tonnes) has discontinued all forward purchases agreements in Malaysia, opting for spot purchases.

“We believe this will give Wilmar stronger bargaining position to demand for even higher discounts especially when CPO tanks (of millers) “overflow” in the coming months.

“Should this happen, purer Malaysian upstream players will suffer' from lower revenue as a result of heavy discounting (vis-vis CPO spot prices) to clear their CPO stocks.”

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Tuesday July 24, 2012

India's higher taxes on imports of refined palm oil likely to hit incomes of M'sian refiners