Regional Plantations - Maybank Kim Eng 2018-12-06: Indonesia Sets New Threshold On Palm Oil Export Levy

Regional Plantation Stocks - Maybank Kim Eng Research | FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - Indonesia Sets New Threshold On Palm Oil Export Levy

A possible game changer

  • Indonesia signed a decree yesterday to exempt palm oil export levy when CPO price is < USD570/t. This will benefit purer upstream planters there and Malaysia’s exports. Indonesia’s downstream players will be the biggest losers as they now have to compete on a level playing field with Malaysian players in the export market.
  • We are generally positive on this change as it may help to reduce Malaysia’s high stockpile.
  • Maintain NEUTRAL on the sector with selected BUYs on First Resources, Bumitama Agri, and Ta Ann.

Indonesia’s export levy now starts at USD570/t

  • After weeks of talks, the Government of Indonesia has finally signed a decree (effective 4 Dec 2018) to amend the palm oil export levy albeit at a higher threshold to an earlier proposal reported on 26 Nov 2018 - see our note on “Regional Plantations - A possible game changer ”.
  • Indonesia previously collected USD50/t levy on CPO export, USD20/t on RBD Palm Oil, and USD30/t for RBD Palm Olein exports at all palm oil price levels to help finance the development of its palm-based biodiesel and replanting programme (of smallholders). Under the amendments, export levy will be zero when CPO price is < USD570/t (3 Dec: ~USD420/t), and rising to USD25/t when CPO price is between USD570-619/t. It will only be reinstated in full (ie USD50/t) when CPO price is above USD619/t – see Fig A in the PDF report attached.

Indonesian farmers are set to benefit the most

  • We believe the recent bumper harvest (Aug-Nov) and logistic constraints in Indonesia have caused tanks to overflow resulting in millers refusing to take in FFB from farmers (without a discount).
  • We heard millers suffered from low oil quality as FFB harvested were not processed in time (ie not within 24 hours of harvest as tanks were full) which resulted in formation of high FFA (“Free Fatty Acid”, ie low oil quality). This forced millers to buy FFB at cheaper prices as they too have had to sell at a discount to refiners because of the low quality.
  • Coupled with the USD50/t CPO levy, it is conceivable that farmers suffered the most during this period.

A more level playing field for Malaysian exporters

  • The removal of this export levy at CPO price below USD570/t will benefit pure upstream players operating in Indonesia (like GENP MK (BUY), Bumitama Agri (BUY), IOI MK (HOLD), TSH MK (HOLD), IJMP MK (Not Rated), LSIP MK (Not Rated)) at the expense of pure downstream players there (no specific names).
  • In theory, upstream planters will get extra USD50/t in CPO sales proceed (which flows directly to their bottom lines) with this new ruling. But it will have neutral impact on integrated players in Indonesia (like First Resources (BUY), KLK MK (HOLD), SDPL MK (HOLD)).
  • As for Malaysia, this will create a more level playing field. Indonesian exporters were previously able to sell CPO at ~MYR200-300/t cheaper than Malaysian exporters. A removal of the export levy can help restore Malaysia’s competitiveness in the export market and quickly bring down Malaysia’s stockpile.
  • Unfortunately, in the absence of reliable data in Indonesia, the market views Malaysia’s stockpile as a proxy to the region’s (ie Indonesia and Malaysia) stockpile for price discovery.

Risk statement

  • There are several risk factors which may affect our sector view, earnings estimates, price targets, and ratings of stocks under coverage. Key risks to the sector and companies are:
    1. weather anomalies resulting in poorer-than-expected output growth,
    2. lower-than-expected CPO price achieved,
    3. negative policies imposed by import countries,
    4. unfriendly government policies at producing countries,
    5. sharply lower crude oil prices which makes palm biodiesel demand not viable, and
    6. weaker competing oil prices (like soybean and rapeseed).

Ong Chee Ting CA Maybank Kim Eng Research | 2018-12-06
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