Speculation emerged that Indonesia will scrap its export tariff for crude palm oil (CPO) in an attempt to boost sales. Three weeks ago, Malaysia had already scrapped the export tax for CPO for a period of two months to support exports and reverse a decline in CPO prices. Malaysian palm oil exports then immediately surged over 30 percent (month-to-month) in the first half of September, indicating the success of the export tax policy. Thus, the two countries – the world’s two largest producers and exporters of CPO – may become involved in a ‘tax war’.

Malaysia’s strategy helped to push the palm oil prices on the benchmark Malaysian Derivatives Exchange to a one-month high after having hit a five-year low at the start of September 2014.

Indonesia has an ‘automatic mechanism’ that when international and local CPO prices drop below USD $750 per metric ton, the export tax is cut to zero percent (this may occur in October).

Palm oil prices have been under pressure in recent months due to favourable weather conditions in the USA (causing US farmers to prepare to harvest a record soybean crop), and a seasonal upswing in CPO output in Indonesia and Malaysia. Soybean oil and palm oil dominate the global market, accounting for about 60 percent of the world’s total production of edible oils. Both commodities can substitute one another, causing food processors to switch between the two commodities as prices fluctuate. If Indonesia also cuts its CPO export tax, then it should spur CPO demand, particularly from top edible oil importers such as India and China. Two major festivals in both countries in the months ahead will boost CPO demand as people will consume more products. These festivals are the Deepavali celebrations in India and Lunar New Year in China.

Indonesian Palm Oil Production and Export:

¹ indicates forecast Sources: Food and Agriculture Organization of the United Nations, Indonesian Palm Oil Producers Association (Gapki) and Indonesian Ministry of Agriculture

Source : Indonesia Investments