RI palm oil tax cut set to press prices lower
RI palm oil tax cut set to press prices lower
SINGAPORE (Dow Jones): Indonesia finally cut the export tax on palm oil Monday, in a move which is set to pressure prices lower in a market already awash with supply in the face of anemic demand, according to industry experts.
The move comes after several months of lofty export taxes, intended to curb rising domestic cooking oil prices in Indonesia, which caused a huge build-up in inventories as producers and refiners awaited the opportunity to sell into the world market.
The key export tax on crude palm oil has been cut to 40 percent from 60 percent, while the tax on refined, bleached, deodorized palm oil and RBD palm olein has been reduced to 32 percent from 55 percent.
The impact on prices has already been felt, although analysts say the true impact won't be seen until Indonesia abolishes the tax altogether. The spot February CPO futures contract on the Commodity and Monetary Exchange of Malaysia slumped 612 ringgit a metric ton to close at 1,930 ringgit a ton Friday from a week earlier, its lowest closing price since December 1997.
In the world market, spot offer prices for processed palm olein have fallen 8.4 percent to $595 a ton Friday from $650 a ton at the start of the year.
Palm oil trading was slow Monday due to a public holiday in Malaysia, the world's largest producer.
"Indonesia is overloaded with oil," said a Jakarta-based trader with a major Indonesian palm oil trading company. "All my tanks are full. I have been looking for tank space, and I just can't get that."
Indonesia's crude palm oil production for marketing year 1998- 99 is forecast at 5.7 million tons, up from 5.0 million tons in 1997-98, according to the U.S. Department of Agriculture. Of the 5.0 million tons, total domestic use for 1998-99 is estimated at 2.9 million tons. The marketing year runs from October to September.
However, one industry official countered that prices in the domestic market will remain marginally more attractive than in the overseas market, unless the rupiah weakens.
At the current exchange rate of Rp 9,000 to the dollar, the cut in export tax "would not boost export trade too much," said Tarmidzi Rangkuti, vice-chairman of the Federation of Indonesian Vegetable Oils and Fats Associations.
The Indonesian palm oil sector is, by all accounts, extraordinarily profitable, said a Jakarta-based economist and trade advisor. The cost of CPO production, on an ex-mill basis, in Indonesia is about $182 a ton, while CPO is sold as much as $585 a ton in the world market.
Profitable as it might be, the steep export tax has discouraged exports. To date, the 60 percent tax paid by exporters, which is included in a government-imposed fixed export price of $535 a ton for crude palm oil, has effectively eliminated any incentive to sell abroad. It has meant that, at the current price, exporters earned only $32 for every ton sold overseas instead of a possible $400 a ton had there been no export tax.
Under the new 40 percent tax, exporters stand to make $139 a ton. The government's fixed price, meanwhile, is due to be revised effective Feb. 8.
Some market watchers and economists said the priority on palm oil shouldn't be on consumers because average household budget for cooking oil is less than 5 percent, compared with another essential food item, rice, which takes up as much as 50 percent of household expenditure.
"They should contain rice prices, which are on par with world levels," said H.S. Dillon, executive director of Jakarta's Center for Agricultural Policy Studies. Dillon is a former official with the Indonesian Ministry of Agriculture.
Some commentators say the government should scrap the tax altogether. Theoretically, it's supposed to progressively reduce the tax to around 10 percent by the end of the year in accordance with the country's agreement with the International Monetary Fund, although many analysts feel pending elections in Indonesia will stop the current government from making too many more policy moves.
"The export tax is the wrong policy for Indonesia," said Pande Silalahi, head of economics at Center for Strategic and International Studies in Jakarta.
However, the fact that the government lowered the export tax on cooking oil, or RBD palm olein, to 32 percent from 55 percent -- eight percentage points lower than the crude palm oil tax -- could create some instability in the domestic market, producers say. Previously the differential was only five percentage points.
Following are Indonesia's new export tax rates for crude and processed palm and coconut oils effective Feb. 1:
Products New Rate Old Rate
(%) (%)
Crude palm oil 40 60
RBD palm oil 32 55
Crude palm olein 40 65
RDB palm olein 32 55
Crude palm stearin 20 25
RBD stearin 10 20
Crude palm kernel oil 30 50
RBD palm kernel oil 20 45
Crude coconut oil 15 20
RBD coconut 10 15
Notes:
CPO = Crude palm oil
RBD = Refined, bleached and deodorized