Palm tax move may see market flooded, weigh on prices

JAKARTA: Palm oil investors holding on to Indonesian stocks ahead of possible changes to the country's export tax, could swamp a well-supplied market and further pressure prices already weakened by global economic fears, analysts and traders said on Wednesday, Aug 24.

In late July, an industry ministry official told Reuters that Southeast Asia's largest economy may cap its maximum edible oil export tax at 20 percent instead of 25 percent.

The official's comments followed remarks from the Indonesian industry ministry late last year that the country would "restructure" its export tax policy on crude palm oil, as the levy has not spurred more local processing into downstream products as intended.

Market speculation among investors of palm oil, used in products such as food, cosmetics, tyres and biofuels, is rife that the Indonesian government may announce changes after the Ramadan fasting season this month.

"Yes, they will announce changes after Lebaran (Eid)," said a Jakarta-based palm oil trader, who forecasts a cap at 22.5 percent. "I heard all was signed (and they're) only waiting for the legal (formalities)."

"You will see more than normal because every refinery wants to capture the benefit too," he added about the flow of Indonesian palm oil inventories after any change to the tax.

At present, trade ministry and industry officials meet every month to decide the tax rate for the following month, using the average spot crude palm oil prices in Rotterdam in the preceding 30 days as a reference price.

Earlier this week, Deddy Saleh, an official at the trade ministry, said Indonesia will maintain the export tax for crude palm oil (CPO) for September at 15 percent.

He said nothing about a new export tax system.

Exporters had paid lower tax of between 3.0 and 4.5 percent until August last year. Prices began to pick up from last September as erratic weather hit production in Malaysia and Indonesia.

"Talking to traders in July, we did see... a lot of trading houses were moving out inventories from Malaysia, with the view that the reduction in (Indonesian) export taxes would reduce their costs," Abah Ofon, a Singapore-based analyst at Standard Chartered Bank.

"Right now in the market there is ample supply," he added.

On Saturday, cargo surveyor Intertek Testing Services said Aug. 1-20 Malaysian palm oil exports climbed 14.5 percent from the same period a month ago, while Societe Generale de Surveillance said two days later exports rose nearly 14 percent.

ECONOMIC WOES

The benchmark November crude palm oil contract on Bursa Malaysia Derivatives traded at 3,050 ringgit ($1,028) at 0715 GMT, after closing at 3,068 ringgit on Tuesday.

In line with other commodities, benchmark palm oil prices have slumped about 20 percent this year, weighed down in part by risk-averse investors, worried about the health of the global economy and sovereign debt levels.

Analysts differ on how much of an impact any eventual change to the export tax in the world's top producer may have, given that macro events have recently overtaken fundamentals to dictate market sentiment.

"I would say the global (economic) trends are a lot stronger pressures on the CPO price than this export tax," John Rachmat, a Singapore-based analyst at Royal Bank of Scotland.

"If Ben Bernanke should pull a rabbit out of the hat and QE3 should materialise, than you can forget about this export tax (as) the CPO price is going to rocket up again."

Earlier this year, top industry analyst James Fry said Indonesia's palm oil export tax is distorting the flow to the market.

Indonesia is expected to produce 22.5 million to 23.0 million tonnes of palm oil this year, having out paced Malaysia as the top palm oil producer in 2007. ($1 = 2.966 ringgit) - Reuters