Malaysia’s preemptive move in lowering export taxes has resulted in increase export volumes, says Barclays report

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KUALA LUMPUR (Sept 23): Malaysia’s preemptive move of lowering its export taxes for crude palm oil (CPO) has resulted in an uptick in exports early this month, according to Barclays’s analysts.

In a note yesterday, the British multinational bank stated that Malaysia had managed to pre-empt Indonesia’s export tax cut and this had resulted in greater export volumes to China.

“The cut was effective as export volumes to China nearly doubled to 84 kilo tonnes in September according to Reuters on September 22,” said the analyst team at Barclays.

The team noted that this was not the first time Malaysia has cut export tax to spur demand, as Malaysia had relaxed the CPO export tax from an average of 20% to 0% for two months in January 2013 and maintained it at 4.5% for the bulk of 2013 to reduce its inventory and encourage export of CPO.

The team expects inventory for both Malaysian and Indonesia palm oil industries to jump further as it begins to enter the peak season which is foreseen not to bode well for CPO prices in the short term.

“The market fears a glut in supply as high inventory is already present as palm producers go into the seasonal peak production season in 2H14. Total August palm oil inventory in Malaysia and Indonesia are estimated to be around 4.3 metric tonnes according to Malaysian Palm Oil Board and our estimates, which is 4.6% higher year on year but 28% lower than that in August 2012 when inventory reached 6 metric tonnes,” the team said.

As Indonesia currently operates a transparent progressive export structure for its palm oil product based on average market prices, the team expects Indonesia to move to a less transparent structure that would make it harder for Malaysia to pre-empt any tax cuts.

However it is unlikely that the palm oil export taxes in Indonesia will be scrapped.

Following the drop of CPO prices below US$750 per tonne, Indonesia CPO export tax is expected to drop to 0% in October.

Barclays expects Golden Agri Resources Ltd  to be the largest beneficiary of the export tax cut with a target price (TP: 62 cents)

It also named Wilmar International Ltd (TP SGD 3.80) and Sime Darby Bhd (TP RM10) as beneficiaries.