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End-August, the Indonesian Government did what it ought to have done long ago. It changed the existing uniform export tax rate of 25 per cent for crude and refined palm oils and built an export tax differential between the two oils by announcing a duty cut to take effect from October 1. This downward revision of export tax structure for crude palm oil (CPO) and products such as refined palmolein is likely to have medium to long-term implications for the global palm oil market in terms of export market share between two of the world's largest exporters and flow of fresh investments into the refining sector. The move is sure to intensify Indonesia's existing competition with the world's second largest producer and exporter Malaysia.
Export tax
Export tax on refined products such as palmolein was reduced late last month from 25 per cent to 13 per cent. For crude palm oil, the duty cut was much smaller, from 25 per cent to 22.5 per cent. Simply put, the Indonesian Government's objective is to promote export of processed palm oils and capture the benefit of value addition locally. With export tax nearly halved, the export competitiveness of Indonesian refined oils is set to improve considerably and provide a challenge to the nearest competitor, Malaysia. Additionally, it will provide fiscal encouragement to Indonesian refinery operators (processor-exporters). At the same time, a much smaller duty reduction in crude palm oil means that for the export market, the product will continue to remain relatively more expensive, and therefore, less competitive. This in turn will encourage larger local sales of CPO to domestic refiners. It is also likely that CPO producers may set up fresh refining capacities to take advantage of the fiscal concession.
excessive capacities
Given the volatility of the global vegetable oil market and somewhat fickle nature of government policies, a lot of caution may be necessary in building new refining capacities, especially to ensure there is no excessive investment or excessive capacities beyond the market's needs. How Malaysia's policymakers would react to the market rival's latest move remains to be seen. To be sure, production and export of palm oil products is an important economic activity for Malaysia. The country can hardly afford to let go its competitive edge or its share of the export market.
Global veg oil market
Four years ago, Indonesia emerged as the world's largest palm oil producer. The Government has been facing the dilemma of having to ensure consumer-friendly palm oil prices for the domestic market and at the same time, maximise export market share. With global vegetable oil prices and palm oil prices ruling at relatively high levels last three years, the Indonesian Government's industrial policy has begun to focus on promoting downstream and value-added production by incentivising such industries.
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