Malaysia's Move To Reduce Export Tax On CPO Could Be Negated By Strong Ringgit

MUMBAI (Commoditiescontrol)-

Malaysian Palm Oil Futures

Malaysian palm oil rose during the week on account of improving demand. The benchmark palm oil contract for March delivery on the Bursa Malaysia Derivatives Exchange during the week ended on 5 January gained by 3.40%, or RM 85, to close at RM 2,590 a tonne.

Malaysia could see rising demand for palm oil from key overseas buyers in the coming weeks following its decision to suspend export taxes on crude palm oil for three months from Monday.

The Malaysian Government has announced the tax suspension on Friday and traders said the move will make Malaysian palm oil more competitive, especially in price sensitive markets such as India and China.

Market is likely to see new buying coming in from China ahead of the Lunar New Year. India will also restock in the first and second quarter of the year as stock levels are declining.

Malaysia usually calculates a reference price each month to determine the crude palm oil export duty rate. Thereby, price above 2,250 ringgit ($563) incurs a tax.

Its last calculated reference price for January was 2,623.31 ringgit per tonne, effectively incurring a 5.5% tax rate.

The Minister of Plantation Industries and Commodities Mah Siew Keong told a press conference on Friday,” The tax suspension was aimed at boosting palm oil prices and reducing high stockpiles”, adding to that he expected stocks to continue to increase in 2018.

The suspension, which is open to all companies with crude palm oil export licenses, will be scrapped before the end of the three-month period if crude palm oil stocks fall to 1.6 million tonnes.

The scheme is one of the short-term pre-emptive measures by the government to manage the fall in crude palm oil prices, so that the smallholders, small-scale farmers incomes will not affect and the country’s oil palm industry continues to be competitive.

Palm oil inventories in Malaysia, the second-biggest producer after Indonesia, had already risen to near two-year high by the end of November, squeezing benchmark prices to a 16-month low in mid-December.

Official data shows, stocks grew 16% in November, from October, to 2.56 million tonnes due to weak exports. Inventories has been rising further to 2.69 million tonnes at the end of December - the highest in over two years - according to a Reuters poll.

The price of palm oil tumbled nearly 20% in 2017, and was up 0.35% at 2,594 ringgit ($649.31) at the close of trade on Friday.

The market men, however, cautioned that the impact of the tax suspension could be muted by gains in the ringgit, which advanced to 3.9950 per U.S. dollar on Friday, breaking the psychologically significant 4 level.

A stronger ringgit, palm oil’s traded currency, usually makes the vegetable oil more expensive for foreign buyers.

The recent strengthening of the ringgit may negate some of the effects, as well as the narrowing gap between palm and soyoil. Malaysia government has not reduced the export tax on RBD Palmolein.

Malaysia December palm data focused on rising stock levels.

All survey poll points to a sharp rise in December end month stock levels averaging 5.43% to 2.698 million tons from 2.557 million in November. Stock levels are already lingering at near 2 year high. Year-end stocks typically rise as production and stock numbers are consolidated towards the close of the year. CIMB Research pegged the highest percentage rise of 6.14% reaching 24 months high.

Meanwhile, exports are set to show a rise of around 8 to 9% buoyed by increases in shipment to India and the E.U. Production is expected to fall by 5 to 7% from November in line with seasonal pattern.

However,the absolute increase in production by 380,000 tons compared to exports, is set to swell end-month stocks to near 2.700 million tons. While most of the December data is well priced in, any surprise higher level of stocks could trigger new round of CPO Futures sell-off.

For now, there is positive outlook on export market and expected change in export taxes could cushion the weight of rising stocks.

All Figures are in million tonnes except imports.

Domestic Crude Palm Oil Scenario

Crude Palm Oil price during the week ending 6th January gained by Rs 6 to trade at Rs 555/10kg at kandla port and also CIF price edged higher by $22.5 at $677.5 tracking positive cues of Malaysia Palm Oil Futures.

Most of the the market participant are expecting that CIF price is likely to decline sharply in next week due to reduction of export tax of crude palm oil in Malaysia but, this is not the case as ringgit is appreciating and subsequent to which, the sellers from Malaysia is unlikely to quote lower prices as crude oil prices are rising. Which will provide support to crude palm oil price so, we may see a marginal decline of $5-$10 in CIF prices.

Domestic demand of palm oil is also picking up for the upcoming Makar Sankranti Festival which is likely to keep crude palm oil price bullish momentum intact for next week.

NEXT WEEK: Crude Palm Oil prices are likely to trade as per the trend of Malaysian Palm Oil Futures.

(By Commoditiescontrol Bureau; +91-22-40015516)