Moody’s lauds M’sia’s move to cut CPO tax

SINGAPORE: Moody’s Investors Service described Malaysia’s move to reduce palm oil tax as credit positive for the industry.

In its Investors Outlook, the rating agency said Malaysia (A3 stable) announced long-awaited rate reductions in its crude palm oil (CPO) export tax effective January 2013.

This would counter the changes that Indonesia (Baa3 stable) made to its CPO tax arrangements in October 2011, and is credit positive for the domestic industry.

“Until the new rates go into effect, we expect downward price pressure on CPO as storage capacity fills and forces stockpile sales. We expect market conditions to return to normal by mid-2013, it said.

Moody’s noted Indonesia changed its CPO export taxes in 2011, trimming the top rate on CPO to 22.5 per cent from 25 per cent and moved the nil tax threshold to US$750 per tonne from US$700 per tonne.

More importantly, it said, in a desire to stimulate domestic, downstream value addition, the tax rate on refined products was broadly halved, cutting the top rate for refined palm oil (RBDPO) to 10 per cent from 23 per cent.

From January 2013, Malaysia’s tax rate on CPO exports will be 4.5 per cent to 8.5 per cent of the price, down from its current rate of 22 per cent to 23 per cent of price.

The rating agency said Malaysia has no tax on exports of processed palm oil.

The annual tax-free export allowance of CPO (increased to 5.5 million tonnes in 2012) will be removed.

Since RBDPO exports are untaxed, the new tax regime narrows the difference in Malaysia’s export tax between CPO and RBDPO to the new CPO tax rate, 4.5 per cent to 8.5 per cent.

Assuming that the domestic CPO price equals the exported CPO price net of the export tax (although local demand-supply balance between refinery capacities and plantation outputs can affect prices significantly), Moody’s said domestic
refining is encouraged by a larger tax differential.

It said the tax differential will now be around 300 basis points greater in Indonesia than Malaysia, thus encouraging great refining in Indonesia.

With Indonesia’s CPO tax of 10.5 per cent and RBDPO tax of 2 per cent, the difference in tax rates is 8.5 per cent.

With Malaysia’s CPO tax at 5.5 per cent and no RBDPO tax, the difference in tax rates is 5.5 per cent.

While the refining tax advantage remains with Indonesia, some customers, for the cost of a few dollars, prefer to deal with the more established Malaysian refiners, which may also provide logistical benefits and savings such as shorter shipping distances.

Moody’s noted that the Malaysian palm oil sector has had a tough year.

Changes to Indonesia’s palm oil export tax regime immediately put Malaysian downstream processors at a disadvantage to their Indonesian counterparts such as Musim Mas (unrated).

This pressure, coupled with lower demand from Europe, led to reduced plant utilisation and negative refining margins for some Malaysian processors, such as FELDA (unrated) and Sime Darby (unrated).

Wilmar International (unrated), the world’s largest processor of palm oil, currently has 64 per cent of its refining capacity in Indonesia, the remainder in Malaysia.

The yield of Malaysian plantations has also been slightly weaker this year.

IOI Corp Bhd (Baa1 negative), for example, produced 8 per cent less palm oil for the year to September 2012 than in the same period a year ago.

“We expect Malaysia’s output of palm oil in 2012 to reach 18.4 million tonnes. Peak production of palm oil usually occurs between June and October, but owing to the lower CPO prices so far this year, stock levels in Malaysia have been running at higher levels than usual.

Stocks of all palm oil products climbed to a record 2.45 million tonnes at end-September from 2.11 million tonnes a month earlier.

Domestic storage capacity is 5.2 million tonnes, but the raw product has a comparatively short shelf life, making the inventory growth a risk.

At the same time, CPO prices are down over eight per cent year-on-year for the first nine months of 2012.

“We believe the tax changes are credit neutral for IOI with its European refineries losing their advantage but with better onshore refining margins. For Golden Agri-Resources (Ba2 stable) and Bakrie Sumatera Plantations (Caa2 stable), the tax change does not help their downstream expansion plans in Indonesia,” it added. — BERNAMA