Op-Ed Commentary: Kangkyu Lee
For economists and investors interested in Southeast Asia, it is vitally important to be informed about the state of tariffs on crude and refined resources. The region is lauded for its raw, export-driven trade of foods, oils, minerals, and tropically-sensitive materials. Regardless of their individual values, the trade and taxation of exported resources from Southeast Asia has a salient influence on the region’s economy.
This week, Malaysia and Indonesia became embroiled in a tax race-to-the-bottom on their international exports of crude palm oil (CPO). CPO serves as the primary cooking oil for nations such as India, Indonesia and Malaysia. For the rest of the world, it is used for the production of a sundry of items that range from confectioneries to cosmetics, soaps and even bio-diesels. Competition between Malaysia and Indonesia is not surprising, as the two countries together produce 86% of the world’s CPO.
There has been a steady decline in CPO prices, and the corresponding rise in inventory has led the Malaysian Palm Oil Council to declare a unilateral decrease on export taxes to 4.5 percent. According to the Plantation Industries and Commodities Minister Datuk Seri Douglas Uggah Embas, with prices hanging at RM 2,200 to RM 2,280 per ton of CPO, this was the clear and immediate solution to reprieve plantation companies of excessive processing volumes.
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There are many implications to Malaysia’s decision. Indeed, what may appear to be a minute stimulation in a niche resource market could likely affect the energy sector of Southeast Asia. The tax exemption is estimated to increase Malaysian palm oil exports by 600,000 tonnes and decrease CPO stocks to 1.6 million tonnes by the end of 2014. Additionally, the tax decrease facilitates lucrative business for Malaysia via ratification of their B7-bio-diesel mandate. This will apportion more palm oil to be processed and supplied for the production of bio-diesel throughout the country and thus increase overall energy supply by the end of the year.
Following the Malaysian tax decrease, the country’s CPO exports substantially increased by 30 percent. Malaysia is the world’s second largest producer of CPO, and the industry’s leader, Indonesia, is now expected to follow its rival’s example. The Indonesian government implemented an ‘automatic mechanism’ that activates when CPO per tonne prices fall below USD $750. Prices look set to drop to the 600s after Malaysia’s tax cuts, and as a result, Indonesia will also cut its CPO export taxes to zero to pull up their supply of CPO to competitive prices.
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The cut in CPO tax is now already drawing increased interest from both India and China. Malaysia nigh doubled its palm oil exports to China to 84,030 tonnes in September, according to cargo surveyor Societe Generale de Surveillance, and the expansion in CPO production and supply makes further sales to the two Asian superpowers likely. The imminent Deepavali celebrations in India and Lunar New Year festival in China will naturally ramp up demand.
The ongoing Malaysia-Indonesia tax wars are unique in that so much CPO supply power rests in these two nations. With economic giants like India and China looking ready to take advantage of their tax cuts, now is an opportune time for other nations to jump on the bandwagon and utilize the ready availability of these practical resources.
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