February 5, 2012 / 2:30 PM / 6 years ago

UPDATE 2-Malaysia issues tax free palm export quotas

(adds more details)

By Niluksi Koswanage

KUALA LUMPUR, Feb 5 (Reuters) - Malaysia has issued this year's tax-free crude palm oil export quotas of 3 million tonnes after weeks of delay, sources said on Sunday, ending speculation it would scrap the quota to help its refiners compete with Indonesian rivals.

Sources with direct knowledge of government plans said some palm oil firms like IOI Corp and state run plantation agency FELDA received their quotas last week. The total quotas account for 15.5 percent of projected output this year in Malaysia, the No.2 producer.

The move ends weeks of talk that Malaysia would scrap the quota, which has tightened regional supply for its refiners after Indonesia raised its export tax for the crude grade to jump-start its own processing industry.

Malaysian refiners now struggle to compete against Indonesian rivals who enjoy better margins, with growing national output and refined palm oil export taxes that were slashed last year to half that of the crude grade.

"The refiners have not been forgotten. The government is looking at providing incentives to refiners to encourage them to go further downstream and produce higher value products compared to Indonesia," a government source said.

"The incentives will be done via special funding from the government. There will be an announcement at the end of this month," added the source.

Local media said last week that the government would scrap the duty-free export quota for crude palm oil while maintaining 23 percent export tax for the grade to safeguard the refining industry. Malaysia does not tax refined palm oil exports.

SPOTLIGHT ON EXPORT QUOTAS

The 2012 tax-free export quota for crude palm oil is less than the 3.6 million tonnes shipped out without any tariffs to Malaysian-owned refiners in Europe and Asia.

As in the past, the government has an option to increase the quota to meet the demands of the licence holders, though that might not happen this year due to slower imports from Indonesia, the sources said.

Plantations holding export licences say the delay by the government to issue quotas slowed shipments in January, putting their businesses and long existing contracts at risk.

Cargo surveyor Societe Generale de Surveillance reported a 13 percent drop in Malaysia's January exports from a month ago. Crude palm oil shipments alone slumped 56 percent.

Shipments of refined, bleached and deodorised palm olein -- used in cooking oil -- fell just 6.4 percent as there was enough crude palm oil supply in Malaysia for refiners to process even though some demand had shifted to Indonesia.

Refiners say the delay in issuing export quota helped to curb rises in domestic price in January. They also say the quota system is not transparent and is subject to abuse, with licence holders offering tax-free crude palm oil to domestic refineries -- accusations planters deny.

"It is election year and government wants to keep firms like FELDA happy as it handles a lot of local farmers who need to offload their crude palm oil," said a Malaysian refiner in Kuala Lumpur.

"The incentives the government promises may not even amount to much; we will have to wait and see. Or maybe we should just look at shifting some of our operations to Indonesia or having more joint ventures with Indonesian firms," he added. (Reporting by Niluksi Koswanage; Editing by Will Waterman)

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