Waiver on CPO Windfall Tax Expected Soon?

Being considered seriously - It was reported in the New Straits Times that the government was likely to waive the windfall tax on crude palm oil (CPO) soon. According to Deputy Finance Minister Datuk Kong Cho Ha, this has been heavily debated in the Finance Ministry and is being considered seriously. Our channel checks reveal that industry players are aggressively lobbying for it.

§ Windfall tax - To recap, the cooking oil stabilization scheme (COSS) palm oil cess was abolished in July 2008 and a windfall profit levy was imposed. For Sabah and Sarawak, it is 7.5% for every tonne of CPO that exceeds RM2,000. While for Peninsular Malaysia, it is 15% for every tonne of CPO that exceeds RM2,000.

§ No impact for now - Given that the CPO spot price is still below RM2,000/t, there is no collection of windfall tax. We are maintaining our CPO price assumption of RM1,930/t for 2009E and 2010E.

§ To lift sentiment - This piece of news is basically government effort to further boost sentiment toward the industry, in our view. If it goes through, it is clearly positive news for the industry, especially as the CPO price edges closer to the RM2,000/t mark. In our previous reports, we have highlighted that there is potential upside to CPO prices if supply of competing oils continues to tighten given unfavourable weather conditions in South America.