Malaysia will increase shipping quotas for tax-free crude palm oil (CPO) by up to two million tonnes this year to help planters cope with an expected increase in output, sources said as the world's No. 2 supplier struggles to maintain export momentum

Malaysia will increase shipping quotas for tax-free crude palm oil (CPO) by up to two million tonnes this year to help planters cope with an expected increase in output, sources said as the world's No. 2 supplier struggles to maintain export momentum.

The move will lift Malaysia's total duty-free CPO export quota to five million tonnes this year and comes after top importer India this month raised base import prices of refined palm oil, encouraging more crude palm oil shipments.

Both Malaysia and India are trying to retain market share after top palm oil producer Indonesia slashed in September export taxes of refined palm oil, used as a cooking oil, to boost its own processing industry.

“We are doing this on a case-by-case basis for local firms since production is starting to rise in the second half of this year and exports are a bit slow,” said one government official who declined to be named due to the sensitivity of the issue.

“It is a stock management effort. This is in an interim response to Indonesia at the moment. We are still formulating a comprehensive response,” the source added.

Malaysia said Jakarta's export tax cut had eaten into its own refined palm oil shipments and hurt its processors. India shares these concerns, especially as it has spent billions to build up its edible oil manufacturing sector.

Benchmark Malaysian palm oil prices rose 1.6% yesterday, driven partly by concerns of the US drought crimping soyoil supplies and also news of the higher quotas from Malaysia, traders said.

The five million tonnes set aside for export account for 27% of Malaysia's 2012 output of 18.4 million tonnes, potentially lifting local delivered prices of CPO and narrowing their discount to the Indonesian export grade.

The tax-free export quota appears to have turned into a stock management tool for the government.

Production has risen consistently since March this year and is expected to go as high as 1.9 million tonnes in September, the Malaysian Palm Oil Board estimates, which is well within the peak yield season for oil palms.

On the other hand, exports have fallen 18.6% during July 125 to below 990,000 tonnes compared with the preceding month due to a lull in Asian demand, data from cargo surveyors show, which has stirred concerns about oversupply.

“The extra allocation of two million tonnes will benefit the planters more than the refiners,” said a trader with a local refinery. - Reuters

“I am sure that this will be subject to abuse.”

Many traders have criticised the quota system for its lack of transparency, saying licence holders offer tax-free CPO to domestic refiners, allegations planters deny.

Refiners also complain that the export quota create an artificial supply squeeze, raising feedstock prices and lowering margins further.

Some traders said the extra export quota would help support palm oil prices in what is likely to be an election year. Many voters are also small oil palm farmers. - Reuters

Source: www.thestar.com.my

How to tell when Crude Palm Oil (CPO) prices are going to drop in Malaysia - Explained

The three main factors that affect CPO prices and are constantly mentioned by commodities experts are the closing stockpile inventories, exports and production. Knowing how these factors affect CPO price trend is a good idea, especially if you have plantation stocks in your watchlist.

Here is an interesting chart I have plotted based on the Malaysia's Palm Oil Board data.

Notice how Palm oil exports and CPO produced moved consistently with each other. Now take note of the Closing Stockpile has been hang on highs since September 2011. They are indicated by the red lines on the chart. The widest gap between tonnes exported/produced and closing stocks on Feb 2012 couldn't have been more alarming!

But hold your horses!

Before you draw any conclusion, lets take a look at the 1-year period CPO Price Chart from 15 May 2011 to 15 May 2012. Rally period starts from Sept 2011 to April 2012 before prices started to decline.

The CPO price rally starts around the end of September 2011.

By April 2012, Palm Oil prices started declining from its peak at around RM 3,600 a tonne.

Now take a look at the 3-factors chart above and notice that September is when the closing inventory stockpile started to build up and real CPO exports (and production) started declining instead?

Picture this- Everyone is asking you for palm oil, pushing demands and causing palm oil prices to soar. You have little. You produce lesser every month and hence, exports lesser every month too. Prices are so good that if you have any excess you would want to ka-ching them, right? So why keep stockpile when you could export them?

Now, get it? But who and why are they stockpiling? Are they letting go their stocks now to flood the market which causes the CPO price decline?

Your guess is as good as mine!

Consequently, public listed palm oil stocks are negatively affected with most of them show declining quarterly net profits for the period of Jan - Mar 2012 (3-factors chart shows exports and production fell). Here are posts on some of the palm oil companies if you would like to read further.

16 May- Tradewinds Plantations quarterly earnings fell 91% to RM 4.34 million due to lower sales at unfavourable palm products prices, revenue rose 164% to RM 608.45 million due to contribution from Mardec Bhd

15 May - United Plantations' Q1 2012 net profit falls 15.6% on higher wages and lower selling prices of CPO, anticipates CPO prices to weaken in second half of 2012 due to recovery in the biological yield cycle coupled with more favourable weather conditions

25 April- TH Plantations reported decline of 40% in net profit to RM 13mil affected by higher production costs, Maybank Research says results underperformed and accounted only 10% of its FY12 forecast, target price RM 2.75 (HOLD)

Take note that the above scenario should not be relied to interpret any future outcomes as this scenario may not repeat perfectly again in the future or the impact may not be similar even if the scenario repeats itself. Every event should be studied and analysed on a case-to-case basis. Please read the disclaimer statement.

Source: CPO data from www.mpob.gov.my and CPO Price graph from www.palmoilhq.com

Crude Palm oil futures fell 5.5% this week with August delivery contract closed at RM 3,096 a tonne due to concerns that investors will hold back purchases in view of the uncertainty and slowing economies - CIMB

Palm oil had the biggest weekly decline in more than 5 months, on concern that Europe’s worsening crisis may stall global economic growth and cut demand for commodities.

The August-delivery contract closed little changed at 3,096 ringgit ($988) a metric ton on the Malaysia Derivatives Exchange. Futures fell 5.5 percent this week, the most since the five days ended Nov. 25.

Moody’s Investors Service lowered debt ratings at 16 Spanish banks, citing a recession and mounting loan losses. Greece’s credit rating was reduced one level by Fitch Ratings on concern that the country may not be able to sustain membership in the euro area. About $4 trillion has been wiped from global equity markets this month as Europe’s deepening crisis threatens the global recovery.

“There are concerns that investors will hold back purchases in view of the uncertainty,” Ivy Ng, an analyst at CIMB Group Holdings Bhd. (CIMB), said by phone in Kuala Lumpur. “Economies may be growing at a slower rate and demand will be affected as well.”

Palm oil exports from Malaysia, the world’s second-biggest producer after Indonesia, rose 0.7 percent to 599,044 tons in the first 15 days of May from the same period in April, Intertek said May 15. Shipments fell 7 percent to 564,477 tons in the period, estimated Societe Generale de Surveillance.

Soybeans for July delivery dropped 0.6 percent to $14.29 a bushel on the Chicago Board of Trade. Soybean oil for the same month fell 0.9 percent to 50.28 cents a pound. Palm oil and soybean oil are both used in foods and fuels.

Palm oil for September delivery lost 2.2 percent to close at 7,974 yuan ($1,260) a ton on the Dalian Commodity Exchange, the lowest closing price for the most-active contract since Jan. 18. Soybean oil for the same month retreated 1.4 percent to end at 9,188 yuan.

Source: www.bloomberg.com

RHB Research expects crude palm oil prices to fall further on the back of the seasonal peak production period for CPO in the second half of 2012, significant premium for larger plantation stocks no longer justifiable

We believe the time has come to start trimming holdings of plantation stocks, as we expect crude palm oil (CPO) prices to fall further on the back of the seasonal peak production period for CPO and improved prospects for the other vegetable oils in 2013.

Although there have been no significant changes to the supply and demand dynamics of the vegetable oil industry, we have noted some slight shift in focus and direction of late, and we believe a lot of the positive factors have already been fully-reflected in prices. In our recent sector reports, we have been cautioning investors to lock in profits once a decent return has been obtained and to only buy on dips.

We reiterate this view, but given the prospects of weaker CPO prices in the second half of 2012, we believe it is no longer justifiable for the larger plantation stocks to trade at a significant premium to the market, and are downgrading our valuation targets accordingly.

We are revising down our valuation benchmarks, and are now attributing a target price to earnings ratio of 14 times to 16 times for the big cap stocks (from 15 times to 17 times), 11 times to 13 times for the mid-cap stocks (from 12 times to 14 times) and seven times to nine times for the small cap stocks. We are downgrading our call on Genting Plantations to market perform (from outperform) and our call on KLK to an underperform (from market perform).

We are downgrading our sector recommendation to neutral (from overweight). Notwithstanding our cautious view on CPO prices, we highlight that Sime Darby is a situational play, as we believe the upcoming listing of Felda Global would have some positive knock-on effect on its valuations. We also see SGX-listed First Resources as a beneficiary of the change in export tax structure in Indonesia.

We maintain our view that CPO prices would remain strong in the first half of 2012, before weakening in the second half, on the back of seasonal factors. We believe CPO prices would average about RM3,200 to RM3,300 per tonne in first half 2012 and about RM2,900 to RM3,000 per tonne in the second half.

Source: www.thestar.com.my

Palm Oil Refiners urges Government to abolish duty-free CPO export quota, currently paying RM 587 per tonne more than Indonesian refiners

The long overdue revision of Malaysia's crude palm oil (CPO) export tax policy which has been unchanged since the 1960s will likely take place by year-end or early next year, according to sources close to the industry.

Sources said the Plantation Industries and Commodities Ministry had last month submitted to the Cabinet several proposals including a fall-back plan to abolish the duty-free CPO export quota while seeking lower CPO export duty.

Later this month, the ministry and the Malaysian Palm Oil Board (MPOB) will hold consultation sessions with industry players, particularly local independent palm oil refiners affected by Indonesia's new palm oil export tax structure.

“Many industry players are looking forward to the sessions with the ministry and the Palm Oil Lab on Indonesia's export duty structure this month,” sources added.

In September last year, Indonesia reduced its export duty on refined bleached and deodorised (RBD) palm olein in bulk to 7% from 15%, while the export duty on CPO is unchanged at 15% to boost export of its processed oils.

Palm Oil Refiners Association (Poram) chief executive officer Mohammad Jaaffar Ahmad said all CPO exports in Indonesia had to be taxed and there was no export duty exemption given such as the duty-free CPO export quota in Malaysia.

For Indonesian CPO producers, either they export their CPO and pay the export duty or they have to sell their CPO locally at CPO export duty countback price basis, he explained.

For example, given changes in the tax structure, as at April 2, Indonesia's CPO available to its refiners is priced at about RM2,923 per tonne while Malaysian CPO to its refiners is about RM3,510 per tonne.

Therefore, Malaysian CPO available to refiners is more expensive by about RM587 or US$192 per tonne.

Even with the export duty payable by Indonesian refiners, on FOB (free on board) basis, Indonesian RBD palm olein is still cheaper than Malaysia's by US$88 per tonne.

For packed products, Jaaffar pointed out that the export duty was only 2% in Indonesia. “With cheap CPO and with low duty export for packed products, Indonesian packers can sell their products at much lower price than Malaysian packers at destinations,” he said.

On the possibility of the fall-back plan being passed by the Government, Jaaffar said: “These are the easiest proposals to be implemented and should have been done as soon as possible.”

He said it would give confidence back to independent palm oil refiners that the Government was serious to support foreign and local investments in Malaysia.

Secondly, it will also help improve the overall refining operational capacity, assuming that there will be less CPO being exported now because of the duty involved.

“I believe what is missing from the Cabinet's consideration is Poram's proposal that plantation (upstream) players consider providing CPO users the present price of CPO less a minimum 30% of gazetted CPO duty,” Jaaffar said.

This can also be in the form of Industrial Adjustment Grant (IAG) for two years.

“Refiners need this window of time because Indonesia will experience an excess refining capacity within two years once all the refineries being build now start operating.

By that time, all the advantages will be passed on to the upstream industry in the form of higher domestic CPO in Indonesia similar to Malaysia.

Jaaffar pointed out that the IAG ideally could be funded from the collection of the proposed CPO duty of 8% and supported from cess collection from the upstream sector.

“The Government must look at how the refiners could get a comparative CPO and crude palm kernel oil (CPKO) feedstocks prices on par with Indonesia for the local market,” he added.

Jaaffar said the industry had been patiently waiting for the government decision for almost eight months now and “finally we are seeing light at the end of the tunnel but will still not be able to get out of the tunnel unless the Government seriously look at the competitive price of domestic CPO and CPKO.”

There are 51 palm oil refineries in Malaysia and most of them are Poram members.

Source: www.thestar.com.my

India's import of crude and refined palm oil increased to 515,000 tons from 350,469, aiding gains in Malaysian palm oil prices - Bloomberg News Survey

Cooking-oil imports by India, the world’s biggest consumer after China, may have surged for the third straight month in April on lower crushing of the domestic crop and higher local prices.

Purchases probably gained 68 percent to 800,000 metric tons from 475,123 tons a year earlier, according to the median estimate of five processors and brokers surveyed by Bloomberg News. Imports of crude and refined palm oil advanced to 515,000 tons from 350,469 tons, the survey showed. The Solvent Extractors’ Association of India will release the data on May 14.

Higher imports may aid gains in Malaysian palm oil prices, which rose to a 13-month high in April, boosting profits for producers including Sime Darby Bhd. (SIME) Futures climbed 5.8 percent this year on concern that global cooking-oil supplies may decline as drought curbs soybean output in Brazil and Argentina. India’s vegetable-oil imports climbed 67 percent to 727,706 tons in March and 21 percent to 3.79 million tons in the five months ended March 31, the processors’ body said April 13.

“The crushing of soybean has substantially decreased this year, and there was a big margin in import of oils as domestic prices were higher,” said Govindlal G. Patel, a managing director at GG Patel & Nikhil Research Co. “This pace of imports will continue for the next few months and we can see imports of around 800,000 tons per month.”

Palm oil for July rose 0.3 percent to 3,360 ringgit ($1,094) a ton on the Malaysia Derivatives Exchange at 5:34 p.m. in Kuala Lumpur yesterday. Futures rose to 3,628 ringgit on April 10, the highest price since March 2011. Soybean oil, which competes with palm oil for use in food and fuels, rose 0.2 percent to 53.37 cents per pound on the Chicago Board of Trade.

Domestic Harvest

Cooking-oil imports by India are set to increase 15 percent to as much as 10 million tons this year as a decline in the domestic oilseed harvest fuels demand, Anil Agrawal, executive director of Sanwaria Agro Oils Ltd. (SAO), said on May 3. The country bought 8.7 million tons in 2010-2011. India’s oilseeds output may drop to 30.1 million tons in the year ending June 30 from 32.5 million tons a year earlier, farm ministry said April 23.

Buyers may boost purchases for June shipment due to a drop in palm oil prices in the last 15 days, Ashok Sethia, executive director at Sethia Oils Ltd., said by phone from Kolkata. Prices have slid 3.2 percent so far this month on speculation that production will climb in Malaysia, the second largest supplier.

“Imports in the next few months will be higher compared to last year but importers may be discouraged to buy to an extent because of a weak rupee,” said Davish Jain, managing director of Prestige Group. The Indian rupee has lost 5.6 percent against the dollar this quarter in Asia’s worst currency performance.

Soybean-oil imports probably surged to 150,000 tons in April from 31,250 tons a year earlier, while sunflower-oil purchases may have risen to 115,000 tons from 76,400 tons, the Bloomberg survey showed.

Edible-oil stockpiles at Indian ports maybe about 835,000 tons at the end of April, said Patel of GG Patel & Nikhil. Palm- oil imports from Indonesia, the biggest producer, and Malaysia make up almost 80 percent of India’s cooking-oil purchases.

Source: www.reuters.com

Plantation Sector Update: Minimum wage policy to have minimal impact on plantation sector as Malayan Agriculture Producers Associations had already increased plantation workers’ wages to RM850 since August 2011 - Public Investment Bank Research

Despite the strong rally in crude palm oil (CPO) prices seen recently, we believe there will be downside pressure in the coming months given the ample supply situation and expected recovery in production. Under our coverage, we prefer Genting Plantations and Sime Darby with respective target prices of RM10.68 and RM11.21.

KL Kepong and IOI Corp, due to stretched valuations and less attractive growth prospects, remain neutral.

The tight disparity between consumption and production level has led to price rallies in most vegetable oils, ranging from 8% to 11% year-to-date. The higher demand for vegetable oil and disruption of supplies have also led to a lower estimated stock/usage ratio, down to 8.2% from 8.6% last year.

Stock/usage of soybean oil is estimated to touch a record low of 6.4% as the dry weather has adversely affected new South American crops. World soybean oil consumption growth of 3.9% will outweigh production growth of 2.1%.

Given the persistent supply concerns, soybean oil prices have risen to above US$1,350 a tonne, the highest level since August 2011.

World palm oil stocks are expected to grow by 4.6% this year on the back of a 5.8% production growth while consumption growth is expected to be lower at 5.7% due to sluggish demand from China and Europe. Stock/usage ratio remains above 10.6%, since 2009.

Indonesia and Malaysia, the world’s two biggest producers, are projected to achieve 25 million tonnes and 19.3 million tonnes respectively, registering a rise of 6.4% and 2.1%.

Malaysian plantation groups are also facing heightened cost pressures this year, mainly from rising labour cost, which account for about 30% to 35% cost of production per tonne of CPO.

The recent introduction of an RM800 to RM900 minimum wage scale across all sectors is expected to have a minimal impact on the plantation sector.

In August last year, the Malayan Agriculture Producers Associations had already increased plantation workers’ wages to RM850, comprising a minimum of RM650 per month and additional remuneration of RM200 per month, the latter not being subject to the Employees Provident Fund and Social Security Organisation deductions.

We think that companies will likely streamline their respective structures according to the minimum wage rate policy, and fully absorbing any negative impacts of wage increase this year. Higher wages would help increase worker efficiency and productivity in the long term.

Source: www.thestar.com.my

Indonesia increases crude palm oil (CPO) Export Tax from 18% to 19.5%

Top global palm oil producer Indonesia will increase its export tax for crude palm oil ( CPO) to 19.5 percent for May from 18 percent in April due to higher international prices, a trade ministry official said on Monday.

The government will also raise its raise the export tax for RBD palm olein to 10 percent in May, versus 9 percent in April, Deddy Saleh, the director general of foreign trade at the trade ministry, told Reuters.

Indonesia sets its commodity export taxes on a monthly basis.

"CPO export tax for May is 19.5 percent because its price in international market in the last one month was increasing," Saleh said.

He also said the government would leave its tax on cocoa beans unchanged at 5 percent for May due to stable international prices.

Southeast Asia's largest economy has a palm export tax system that aims to boost downstream industries, secure domestic supplies and reduce volatility in cooking oil prices.

The tax rate for the following month is calculated based on CIF Rotterdam prices, Malaysian benchmark and Jakarta futures prices.

By the midday break on Monday, benchmark July palm oil futures on the Bursa Malaysia Derivatives Exchange lost 0.1 percent to 3,501 ringgit ($1,155) per tonne. Throughout April, prices have gained about 2 percent.

Last August, Indonesia set new palm oil export tax rules which include setting the minimum level for the CPO export tax at 7.5 percent versus 1.5 percent previously.

Source: www.thestar.com.my

Note: Some of Malaysia's largest palm oil players have presence in Indonesia. For instances, Sime Darby website indicates that it has presence in eight provinces in Indonesia with a total landbank of 285,571 hectares out of which 207,889 are planted with oil palm, representing approximately 40% of the company’s total planted area.The question is how significant will this increase in export tax impact to their profitability?