FIRST RESOURCES LIMITED (SGX:EB5)
GOLDEN AGRI-RESOURCES LTD (SGX:E5H)
WILMAR INTERNATIONAL LIMITED (SGX:F34)
Agribusiness - Potential Impact Of Indonesia’s Export Levy Revision
- Indonesia’s revised progressive export levy structure is negative for upstream Indonesia palm oil producers but slightly positive for downstream players.
- Malaysian upstream palm oil players are likely beneficiaries of this news.
- The changes will ensure the continuity of Indonesia’s B30 mandate.
Palm oil export levy moves from fixed to progressive structure
- The Indonesian government has revised the export levy structure on palm oil exports, which will become effective on 10 Dec 2020. Under the revised structure, the export levy will be linked to the CPO reference price. The export levy will be raised by US$12.5 to US$15 per tonne for every US$25/tonne increase in CPO reference price beyond US$670/tonne and up to US$995/tonne.
- Previously, export levies were fixed at US$25- 55/tonne for CPO and processed palm products regardless of CPO price.
Export levy changed to fund B30 programme
- The government has been mulling raising the export levy for some time as one of the ways to fund the widening price gap between domestic biodiesel and gas oil. The changes are to help rebuild the CPO fund’s coffers, which are nearly empty.
- To recap, Indonesia's oil palm plantation fund management agency (BPDPKS) supports the biodiesel mandate by bridging the gap between prices of diesel and locally produced palm-based biodiesel and compensating biodiesel producers through the CPO fund.
Will the changes be sufficient to bridge the gap?
- The above initiatives clearly demonstrate the government’s and industry players’ commitment to pursue B30 (equivalent to 9.2m kls domestic biodiesel usage) despite the funding challenges, which became evident following the collapse in crude oil prices. It is not known how much funds BPDPKS currently has and we have assumed it has only a minimal amount.
- Our rough calculation, assuming 34m tonnes of palm oil and related products are exported from Indonesia in 2021F on the revised export levy structure, reveals that the funds collected will be able to fund the B30 programme.
Negative for upstream palm oil producers in Indonesia
- We view the revision in the export levy structure as negative for the upstream planters in Indonesia (London Sumatra Indonesia, Dharma Satya Nusantara, Bumitama Agri (SGX:P8Z), Genting Plantations, IJM Plantations) as they will not be able to enjoy the usual bump in earnings if CPO prices rise beyond US$670/tonne; most will go to the higher export levy and export tax (assuming they are not able to pass this on to consumers).
- To put things into perspective, with the new structure in place, the export levy for CPO will be US$180/tonne while export tax has been fixed at US$33/tonne for Dec 20. This means CPO in Indonesia is priced at a discount of as much as US$213/tonne (RM864/tonne) to that in Malaysia (which currently enjoys zero export tax on CPO).
- On the flipside, the regime change will ensure the continuity of the B30 programme and cushion CPO prices against any downside in the event of a palm oil supply glut.
Positive for Indonesia downstream players, Malaysian planters
- The new regime is positive for downstream palm oil players in Indonesia, like Wilmar (SGX:F34), as they will benefit from the wider differential in export levy rate between processed palm oil and CPO (if CPO prices rise above US$670/tonne), which will boost processing margins as they will be able to procure CPO at below international market price.
- Malaysian upstream palm oil producers (Hap Seng Plantations, Ta Ann) are also expected to benefit from this revision as it will make Malaysian palm oil more competitive and boost Malaysian palm oil prices if the export levy is passed on to consumers.
- For integrated palm oil producers in Indonesia, like Golden Agri Resources (SGX:E5H), First Resources (SGX:EB5), Astra Agro Lestari and Sime Darby Plants, estate earnings are likely to be negatively impacted by the higher export levy structure but less so than upstream producers as this could be partially offset by higher downstream earnings.
- The export levy changes will not significantly impact our earnings forecasts as we have assumed CPO price of US$2,500/tonne (or US$610/tonne) for 2021F. We retain our NEUTRAL rating to sector.
Ivy NG Lee Fang CFA
CGS-CIMB Research
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Nagulan RAVI
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-12-07
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