Felda Urges Tax-Free Palm Oil to Combat Reserves: Southeast Asia

Felda Global Ventures Holdings Bhd. (FGV) said that palm oil shipments from Malaysia, the largest producer after Indonesia, should be allowed duty-free for some companies until midyear to help reduce near-record stockpiles.

There’s a risk reserves will be carried into the second half unless they are cleared, Sabri Ahmad, chief executive officer of the third-largest operator of palm plantations, said in an interview. Government programs, such as increased blending of palm in biodiesel, known as B10, should be speeded up, Sabri said yesterday. Exports in March are set to be taxed at 4.5 percent after two months of duty-free shipments.

The world’s most-used cooking oil is mired in a bear market as supply and stockpiles have surged to records, and Sabri’s comments reflect producers’ concern that the reserves need to be reduced to pave the way for a rebound in prices. While Sime Darby (SIME) Bhd. said yesterday that it expects palm to rally in the second half, Dorab Mistry, a director at Godrej International Ltd. who’s traded the oil for more than three decades, has said the outlook is bearish as global oilseed supplies increase.

“If you have duty-free from Malaysia just for a short period only until June to clear stocks, this will help,” Sabri said in his office in Kuala Lumpur, proposing that the break apply to so-called integrated companies that have local estates and refineries overseas. If something new isn’t done, “it’s going to be burdensome stocks going into October,” he said. Malaysian supply typically peaks in September or October.

Bear Market

Palm, harvested year-round in Southeast Asia, is used in foods, biofuels and cosmetics. The most-active price on the Malaysia Derivatives Exchange, a regional benchmark, has lost 27 percent over the past year, and ended at 2,397 ringgit ($775) a ton today. Futures fell 23 percent last year, extending a 16 percent decline in 2011, as reserves in Malaysia reached 2.63 million tons in December, the highest level ever.

To spur a drop in the stockpiles, Malaysia’s government replaced from Jan. 1 an export tariff of about 23 percent and an annual duty-free quota with a sliding-scale levy from 4.5 percent to 8.5 percent. With prices below the threshold that triggers the lowest rate, shipments in January and this month have been duty-free. Next month, the lowest tax rate will apply.

“It will be very difficult for the government to change it so soon after implementing it,” said Ivy Ng, an analyst at CIMB Group Holdings Bhd. (CIMB) “It could also send a negative signal to the market maybe.”

Indonesia Challenge

An extension of tariff-free shipments from Malaysia in line with Sabri’s suggestion would boost the challenge to Indonesia. While the Indonesian Palm Oil Association has urged lower taxes in that country, Southeast Asia’s largest economy will probably maintain its policy, Fadhil Hasan, executive director at the group, said on Feb. 5. Deputy Trade Minister Bayu Krisnamurthi said Feb. 7 that the government would stick with its approach for now, according to a text message. Indonesia’s rate for March has been set at 10.5 percent from 9 percent this month.

Stockpiles in Malaysia held near the record in January, according to the Malaysian Palm Oil Board. While production fell 10 percent last month compared with December, it was still 24 percent higher than a year earlier. Global stockpiles will gain to a record 7.203 million tons this season, according to a projection from the U.S. Department of Agriculture.

Output in Malaysia will total 18.9 million tons in 2013, matching the biggest-ever crop in 2011, the Malaysian Palm Oil Board forecasts. Indonesia may harvest a record 30 million tons as more trees mature, Derom Bangun, chairman of that nation’s board, said in Jakarta on Feb. 18.

‘Value for Money’

“I’m cautiously optimistic” about the outlook for prices, said Sabri, forecasting that palm may trade between 2,500 ringgit and 2,800 ringgit a ton this year even as stockpiles remain high. “Because this discount vis-a-vis soybean oil is very big, palm oil is value for money. So there are a lot of exports going to China, India and also to Europe.”

Soy oil, crushed from the beans, is a rival product that can be used in cooking. Palm’s discount to soy was at $318.29 a ton today, compared with a five-year average of about $183 a ton, according to data compiled by Bloomberg.

Palm will probably drop this year after Asian producers boosted acreage and global oilseed supplies rose, Godrej’s Mistry told Bloomberg in comments published on Feb. 26. Mistry and Sabri are both scheduled to speak next week at an annual palm and lauric oils conference and exhibition in Kuala Lumpur arranged by Bursa Malaysia Bhd.

Profit Slump

Lower prices have hurt producers’ earnings, with Sime Darby, the world’s biggest listed producer, reporting a 36 percent drop in second-quarter profit yesterday, and Felda Global declaring a similar drop in fourth-quarter net income on Feb. 26.

Mohd Bakke Salleh, chief executive officer at Sime Darby, said yesterday that palm may reach as much as 2,800 ringgit in the second half. UBS AG said that prices may advance this year on a recovery in demand, according to a report dated Feb. 26.

Total crude palm output at Felda Global and its associates may be 3.3 million tons this year, said Sabri. That’s slightly above last year’s 3.285 million tons, according to data from the company. Although a replanting program will continue, the effect will be offset by new trees reaching maturity and a higher oil- extraction rate, he said.

Felda Global’s fourth-quarter net income fell 36 percent to 179.6 million ringgit in the three months to Dec. 31 from a year earlier, the company said this week. Revenue doubled to 3.86 billion ringgit. The company, which completed a $3.3 billion initial public offering in June, is looking at acquisitions both locally and overseas, Sabri said, without giving details.

The company has appointed Mohammed Emir Mavani Abdullah as CEO designate with effect from Jan. 1 as Sabri’s contract as group president and CEO expires on July 15, it said in a stock- exchange filing on Jan. 2. The company’s shares traded at 4.42 ringgit today, 4.3 percent lower this year.

Total palm shipments from Malaysia this month were 1.33 million tons, 9.1 percent lower than January, according to an estimate from surveyor Intertek today. Exports to South Asia and China fell, while European cargoes rose, the data showed.

“We have to do something now until June,” said Sabri. “So that by July onwards, when the production shoots up, we are quite comfortable.”

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net

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