Shifting Fortunes

Enrich thy neighbour,beggar thy neighbour.

As they say,English is contextual. It depends on the words and the situation that it is applied; to get at its real meaning.

So, in this case, it is clear that the meaning does not exist in a vacuum and not amongst neighbours proferring the same wares.

Reduction of taxes on edible oil by Indonesia is going to upset Malaysia for sure.

Unless Malaysia does the same thing to bring down taxes to an equivalent level, expect lower export yield as even Malaysian refineries may move to neighbouring Indonesia to tap on higher margins.

Will Malaysia put at risk a US20 billion industry?

Remember that foreign investors and smaller palm oil refiners process 60 per cent of the country’s output.US agribusiness Cargill and Japan’s Nisshin Olio operate refineries in Malaysia where the margins have come under severe pressure in recent months.

Malaysia definitely cannot afford to lose the investment already made by non-integrated refineries.The consequence could be catastrophic especially for the smallholders and private millers which are depending on them now to off-load their fresh fruit bunches and crude palm oil.

Currently, Indonesia is offering discounts on processed palm oil to markets in India and Pakistan as they enjoy a price advantage of US$100 per tonne because of lower export taxes.

Malaysia is undoubtedly worried about the 25 new refineries with a combined capacity of 9.6 million tonnes.coming on steam.

Independent Singaporean refiner Mewah, which owns some of the biggest factories in Malaysia, has already said it would delay ongoing plans for a new processor in Malaysia’s Sabah state to focus on building one in Indonesia.

Other existing players may follow Mewah so long as the government keeps an annual tax-free crude palm oil (CPO) export quota of 3 million tonnes, which tightens supply, raises feedstock costs and reduces factory use rates.

Malaysia taxes crude palm oil exports to protect its refining sector where capacity stands at nearly 24 million tonnes but imposes the quota to help firms like Sime Darby and IOI Corp feed their overseas refineries.

The duty free export quota will reduce the average refining capacity utilisation this year to about 68 per cent.

The impact will be more pronounced with the quota estimated to mop up about 15 per cent of Malaysia’s projected crude palm oil output this year of over 19 million tonnes.

Apparently,for some refineries with a refining capacity utilisation rate of less than 60 per cent, it would be difficult to sustain their operations.

The bigger blow for these standalone refiners will come from Indonesia where greater refining capacity use and lower export taxes will see less crude palm oil shipped to Malaysia.

In 2011,Malaysia imported a record 1.3 million tonnes of crude palm oil from Indonesia to keep its refineries running but this year, it could be an entirely different story. as limited imports could be costly and further depress margins.

On a sweeter note, big Malaysian palm oil firms with a huge plantation bank and refineries like Sime, IOI, KL Kepong and United Plantations will still survive,

This, however does not preclude them from investing in Indonesia because they have plantations there. Some have already joint-ventures in Indonesia in the downstream industry.

So, tax people at the Ministry of Finance, what next?