Palm prices dip anew after tax reforms fall short

The rally in palm oil prices went into reverse as long-awaited measures by Malaysia to support values fell short of expectations, with the government delaying a tax perk, and not specifying its amount.

Bernard Dompok, Malaysia's commodities minister, revealed in a statement much-anticipated by investors a range of measures to "strengthen the competitiveness of the palm oil industry" in response to a rise in inventories which sent prices earlier this month to a three-year low.

Measures included a plan to raise to 10%, from 5%, the level of palm oil-based biofuel into Malaysian forecourt diesel, which would raise domestic consumption of the vegetable oil by 300,000 tonnes a year.

Mr Dompok also revealed he was considering proposals to incentivise the replanting of "old and unproductive" palm trees, a move which stands to temporarily quell output while boosting output prospects for the future, when world demand is expected to have risen to soak up extra supplies.

"It is estimated that a planted area of 100,000 hectares needs to be replanted and this is envisaged to reduce supply of 300,000 tonnes of crude palm oil," he said.

'Bit of a sideshow'

However, investors questioned the efficacy of the  measures in the context of a country which produces some 18m-19m tonnes of palm oil a year, from more than 5.0m hectares of plantations.

"These bits are a bit of a sideshow," a Singapore trader told

And the government disappointed investors on central proposal, over tax reforms to boost exports, and enable Malaysia's industry to compete better with rivals in Indonesia, where reforms to duty levels appear to have met with success in boosting shipments.

While confirming that Malaysia would cut palm oil export levies, to allow the country's palm oil industry "to compete with other palm oil exporting countries in terms of prices", Mr Dompok declined to say how much the reduction would be from the current 23%.

Furthermore, the introduction of the new regime was slated for January 1, rather than the immediate implementation that many investors had hoped for.

He also flagged the removal, on the same date, of a duty-free quota on palm oil exports - which commentators earlier in the year had been seen likely to be extended in a drive to boost shipments.

'A bit of a disappointment'

The reaction in Kuala Lumpur was to send palm oil for December delivery, the benchmark contract, down more than 5%, although the lot recovered some ground to stand at 2,478 ringgit a tonne in late deals a drop of 1.8% on the day.

"The market was hoping for something generous, something a lot more concrete and having it implemented quickly," the Singapore trader said.

"The statement was a bit of a disappointment, compared with what people had been hoping for."

Contracts for delivery in 2013, after the changes to the palm oil taxation regime is to be introduced, fared no better, with the February lot down 1.9% at 2,582 ringgit a tonne, and the March contract shedding 3.8% to 2,590 ringgit a tonne.

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