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Govt to impose cess on palm millers
On Sunday, the papers quoted Minister of Plantation Industries and Commodities Datuk Peter Chin Fah Kui as saying that effective 1 June 2007, the government will impose cess on palm oil millers, a method used in the past to offset price differences when olein prices soared beyond RM1,700 per tonne. The government is reviewing the implementation of the cooking oil price stabilisation scheme to ensure that the ceiling price and supply of cooking oil are sustained. Smallholders will be exempted. According to the minister, the cess will only be imposed on estates and not smallholders. The ministry is targeting a cess collection of RM45m a month.
Ceiling price of cooking oil to be maintained. Chin said although CPO prices had soared, the government would maintain the ceiling price of cooking oil which had been enforced since 1997 by ensuring an average supply of 50,000 tonnes of palmbased cooking oil a month for the local market.
Govt to subsidise refiners’ losses. To tackle the recent price increase in cooking oil by some suppliers, the government will compensate or subsidise losses incurred by palm oil-based cooking oil suppliers arising from the difference between the market price of olein and that fixed by the government.
This news follows a Starbiz report on Saturday that the government may impose a windfall tax or a cooking oil price stabilisation tax on oil palm plantation companies in the near term as part of the efforts to subsidise the escalating cost of producing palm oil-based cooking oil.
Two potential scenarios. Industry consultant M.R. Chandran said there were two likely scenarios – a windfall tax or a windfall tax together with a cooking oil price stabilisation tax which had been slapped on plantation companies in the late 1990s. In 1997, the government imposed a cooking oil price stabilisation tax on plantation companies which were required to pay 50 sen for every RM10 increase in CPO price above the base level of RM1,450 per tonne. A year later, planters were subjected to a windfall tax of RM50 whenever CPO price topped RM2,000 per tonne.
Chandran, a former Malaysian Palm Oil Association chief executive, said: “With CPO currently trading at RM2,200 to RM2,300 per tonne, I believe the government will just consider a windfall tax on palm oil plantation players.”
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Comments
Not a surprise. This news does not come as a surprise to us as we had highlighted in last Friday’s daily that the government may tax palm producers to resolve the issue of cooking oil shortages.
Cess is part of cooking oil stabilisation scheme. It is not clear if a separate windfall tax will be imposed. We think the cess that the minister is referring to comes under the cooking oil stabilisation fund scheme. This scheme has been implemented twice before in 1997 and 2004 when palm oil price went above RM1,700 per tonne.
Palm oil producers had to pay 50 sen cess for every RM10 increase above RM1,450 a tonne for CPO. If the same rate of cess is imposed this time around, palm oil producers may have to pay RM38 tax per tonne based on the RM2,210 average CPO price achieved in Apr 07. This works out to only 1.7% of the CPO price.
What about windfall profit levy? This tax was proposed under the 1999 Budget to give the government more revenue. Essentially, planters were taxed a maximum of RM50 per tonne when CPO price exceeded RM2,000 per tonne (for more details, please refer to Figure 3). The windfall tax took effect on 1 Jan 1999 but was later scrapped when CPO price went below RM2,000.
The likely scenario. We believe the government will stop at introducing the cess rate and will not impose a windfall tax given that its aim is to help subsidise cooking oil in the country, rather than raise additional revenue for the government. We believe the proceeds from the cess rate will be sufficient to keep cooking oil prices at the current controlled price, assuming the government imposes the same rate as under the previous cooking oil stabilisation scheme. At the current CPO price of RM2,300 per tonne, the government will be able to collect around RM42.50 of cess for every tonne of CPO produced. This translates into around RM680m of cess revenue per annum or RM56m per month assuming the country produces 16m tonnes of CPO in 2007. This should more than meet the ministry’s plan of collecting around RM45m of cess a month, even if we exclude smallholders which own around 10% of total planted oil palm area in the country.
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Valuation and recommendation
Potential earnings impact. This news is negative for palm oil producers as they will bear the full brunt of the tax. Based on our current average CPO price forecasts of RM2,030 for 2007 and RM2,100 for 2008, we estimate that it will translate into additional costs of RM29 per tonne in 2007 and RM32.5 per tonne in 2008, trimming 1-2% off our FY08 EPS forecasts for the plantation companies under our coverage.
Asiatic is most affected as it is a pure planter and derives all of its plantation earnings from Malaysia. KL Kepong is less sensitive to the tax as its Indonesian operations will not be affected by it. IOI Corp’s earnings are also less affected by the cess as part of its earnings comes from non-plantation businesses.
Upgrade in CPO price to offset the impact of higher palm tax. We are keeping our earnings forecasts until the government makes a formal announcement on the cess rate, possibly as early as this week. While this news may put a damper on the current bullish sentiment on plantation companies, we maintain our OVERWEIGHT call on the sector as the potential earnings impact is not expected to be significant. We expect the upbeat sentiment on CPO price to override any negative impact from the new tax. Furthermore, we are in the midst of reviewing our CPO price forecasts and expect the potential upgrade in price to offset the impact of cess. Intact are our OUTPERFORM ratings on KL Kepong and Asiatic and NEUTRAL call on IOI Corp.
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filed:Plantation update - Not unduly taxing.pdf
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