July 30 (Reuters) - Malaysia will increase shipping quotas for tax free crude palm oil by up to 2 million tonnes this year to help planters cope with an expected increase in output, sources said on Monday as the world's No.2 supplier struggles to maintain export momentum.
The move will lift Malaysia's total duty free CPO export quota to 5 million tonnes this year and comes after top importer India this month raised base import prices of refined palm oil, encouraging more crude palm oil shipments.
Both Malaysia and India are trying to retain market share after top palm oil producer Indonesia slashed in September export taxes of refined palm oil, used as a cooking oil, to boost its own processing industry.
"We are doing this on a case-by-case basis for local firms since production is starting to rise in the second half of this year and exports are a bit slow," said one government official who declined to be named due to the sensitivity of the issue.
"It is a stock management effort. This is in an interim response to Indonesia at the moment. We are still formulating a comprehensive response," the source added.
Malaysia says Jakarta's export tax cut has eaten into its own refined palm oil shipments and hurt its processors. India shares these concerns, especially as it has spent billions to build up its edible oil manufacturing sector.
Benchmark Malaysian palm oil prices rose 1.6 percent on Monday, driven partly by concerns of the U.S drought crimping soyoil supplies and also news of the higher quotas from Malaysia, traders said.
EXPORT QUOTAS
The five million tonnes set aside for export account for 27 percent of Malaysia's 2012 output of 18.4 million tonnes, potentially lifting local delivered prices of crude palm oil and narrowing their discount to the Indonesian export grade.
The tax free export quota, initially designed to help large planters such as Sime Darby SIME.KL and IOI Corp IOIB.KL ship out cheap feedstock for their overseas refineries, appears to have turned into a stock management tool for the government.
Production has risen consistently since March this year and it expected to go as high as 1.9 million tonnes in September, the Malaysian Palm Oil Board estimates, which is well within the peak yield season for oil palms.
On the other hand, exports have fallen 18.6 percent in July 1-25 to below 990,000 tonnes compared to a month ago due to a lull in Asian demand, data from cargo surveyors show, which has stirred concerns about oversupply.
"The extra allocation of 2 million tonnes will benefit the planters more than the refiners," said a trader with a local refinery. "I am sure that this will be subject to abuse."
Many traders have criticised the quota system for its lack of transparency, saying licence holders offer tax free crude palm oil to domestic refiners, allegations planters deny.
Refiners also complain that the export quota create an artificial supply squeeze, raising feedstock prices and lowering margins further.
Some traders say the extra export quota will help support palm oil prices in what is likely to be an election year. Many voters are also small oil palm farmers.
"Exports have been slowing and so have the earnings, so the government is using the quota to keep revenue flowing for the planters," said a trader with a palm oil firm that holds a licence for export quotas.
