KUALA LUMUR (Nikkei Markets) -- Malaysia, the world's second-largest palm oil producer after Indonesia, Monday cut its export tax rate on crude palm oil for September to nil as prices remain weak amid rising inventory.
The country is charging 4.5% tax on exports of crude palm oil in August.
Malaysia has a multi-tier tax rate for exports of crude palm oil that starts at 4.5%, which kicks in when market prices exceed 2,250 ringgit ($524.35) a ton. The highest tier charges 8.5% at prices above 3,450 ringgit a ton.
Analysts said exports could pick up with better demand from India, the European Union and China, while production growth moderates in the coming months, helping to trim stockpile of the edible oil used in everything from snacks to cosmetics.
"It will lead to lower inventory level in Malaysia," said MIDF Amanah Investment Bank's analyst Sean Lim. "We believe that market priced in the zero percent tax but the market has not priced in the tree stress."
Malaysia's palm oil inventory expanded 0.9% in July from a month earlier to 2.21 million tons as production surged ahead of exports growth, official data released Friday showed. Output jumped 13% month-on-month to 1.50 million tons, while exports rose 7.1% to 1.21 million tons.
So far this year, palm oil production has declined 1.1% to 10.4 million tons in part due to the lingering impact from the El Nino weather conditions. The August-October period is typically a peak production season.
However, weather experts say there is a 65% chance for El Nino to appear during the fall of 2018, which could spell drought and shrivel palm trees in Malaysia and Indonesia. In the nearer term, palm oil stocks will probably rise further though any pressure on prices will be limited by robust demand.
"We expect exports to continue increasing in Aug-Sep on the back of festive demand from India and increasing demand from China due to the Golden Week in October," brokerage UOB Kay Hian wrote in a note. "Also, biodiesel exports are increasing as gasoil prices are at a premium to CPO prices."
Crude palm oil-to-gasoil discount is currently at around $110 per ton compared to its one-year average premium of $27, making biodiesel blending profitable, said Kenanga Investment Bank's analyst Chan Ken Yew.
"There should be increasingly more discretionary biodiesel blending, supporting exports volume to EU," Chan said. Despite the lackluster immediate outlook, production improvements and limited downside risk could support planters' margins in the second half, he noted.
The most-traded crude palm oil futures contract on Bursa Malaysia Derivatives for October delivery fell 0.8% to 2225.00 ringgit a ton on Monday. Shares of plantation companies fell along with the broader market decline.
Sime Darby Plantations, the world's biggest palm oil producer by acreage, fell 3.0% to 5.21 ringgit, while the benchmark FTSE Bursa Malaysia KLCI ended 1.2% lower.