New palm oil markets could offset EU taxes

By Aidila Razak

The emergence of new markets for Malaysian palm oil products could help buffer the impact of taxes of up to 6.5 percent expected for most downstream products exported to the European Union (EU) starting Jan 2014.

“There has been an emergence of new and growing export markets like India, Iran, Egypt and Ukraine in the recent years.

“(These) new markets could help buffer the impact of lower exports to the EU, should it come to pass,” Alliance Research analyst Arhnue Tan said in a note.

Export to EU in the first two months of 2013 made up 12.4 percent of total Malaysian palm oil product exports.

Tan added that under the revised Generalised Scheme of Preferences (GSP), taxes on palm oil products will be centred on downstream products, with the bulk of it taxed at 6.5 percent.

Malaysia’s palm oil product exports to the EU is expected to be taxed from 3.8 percent to 6.5 percent starting next year following Malaysia’s release from the European Union’s GSP.

Malaysia will lose its GSP status in January 2014 as it has been classified as an upper-middle income country by the World Bank.

EU FTA still not on horizon

Tan noted that the taxes “may not come into play” if Malaysia and the EU finalises its free trade agreement by January 2014. This is, however, unlikely.

“We read from the Ministry of International Trade and Industry website that the (Malaysia-EU Free Trade Agreement) was supposed to be completed in mid-2012, but as of now continue to see no development,” she said.

Malaysia is expected to benefit from the GSP until Dec 31, 2015 if it can conclude negotiations on the FTA before 2014.

Malaysia’s toughest competitor in the palm oil market is in Indonesia. Indonesia, a developing country, will not be affected by the taxes.

Among companies expected to be affected are IOI Corp, Kuala Lumpur Kepong (KLK) and Sime Darby, which are large exporters to the EU market.

“That said, companies like KLK and Sime Darby have downstream facilities (refineries) being built in Indonesia, and this could help buffer the overall impact from these taxes,” she said.

She said that IOI could escape “unscathed” if taxes do not apply for crude palm oil exports as most of IOI’s downstream facilities are located in Europe.

KLK has previously expressed concern that the new EU taxes will be a “very big problem”, especially considering Indonesia’s tax structure which already put Malaysian players at a disadvantage.