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NEWS UPDATES Asean Affairs                2  August 2011

Indonesia could lower palm oil tax

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Indonesia, the world's largest palm oil producer and exporter, could lower the maximum export tax rate by this month, a small concession by Jakarta to a powerful industry lobby that says the duty structure hurts trade.

The existing palm oil export system was put in place to secure domestic supply and reduce volatility in cooking oil prices. In 1998, high cooking oil and other food product prices sparked riots in the country.

The government now charges between 1.5 percent and 25 percent depending on average spot Rotterdam market prices in the preceding 30 days.

Indonesia and Malaysia, the No. 2 palm oil producer, have seen strong output that is likely to last into 2012 and has already led to a massive stock build-up. Traders expect the countries' high combined stocks to hit a record in the third quarter.

For Indonesia, traders say stocks are currently at 2.3 million to 2.5 million tons. Lowering the export taxes suggests Jakarta is comfortable that cooking oil supplies will not get squeezed, even during Ramadan when demand spikes.

Indonesia is likely to cut the maximum tax to 22.5 percent, meaning the tax at the higher price brackets will be lower by 2.5 percentage points. This is a small concession given the palm oil lobby has been asking for the duty to be capped at 15 percent to 20 percent.

Adjusting the top of the export tax schedule will have little impact on palm oil trade, given that benchmark Malaysian palm oil futures KPOc3 as well as Asian and Rotterdam cash markets have fallen to the midlevel price bracket.

Also, the tax-free floor price is expected to rise to $750 from $700 a ton, giving a little breathing space to producers. Traders are also expecting the maximum palm-based biofuel export tax to be lowered to 7.5 percent from 10 percent, signaling more shipments of the product to Europe and adding to earnings of producers such as Singapore's Wilmar.

But European demand for palm-based biodiesel is strong in the summer months and only if the competing rapeseed crop is smaller than usual, which is the case this summer.

Traders say minor changes in the progressive tax system do little to address the problems facing the palm oil industry in Southeast Asia's largest economy.

Palm oil producers cannot sell their products forward and hedge on Malaysian palm oil futures as they are exposed to possible tax fluctuations, creating a huge barrier to trading.


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