Regional Plantations - Maybank Kim Eng 2020-12-04: Integrated Indonesian Players Better Off Than Indonesia Upstream Under Newly Approved Export Levy Structure

FIRST RESOURCES LIMITED (SGX:EB5) BUMITAMA AGRI LTD. (SGX:P8Z)

Regional Plantations - Integrated Indonesian Players Better Off Than Indonesia Upstream Under Newly Approved Export Levy Structure

The Indonesian government is sending a strong positive signal that it is committed on its B30 mandate as it approved a progressive export levy structure to boost CPO Fund. The new levy, similar to those highlighted in our report: Regional Plantations - Maybank Kim Eng 2020-11-21: Indonesia’s Export Levy Conundrum Seen Hurting Upstream More, will however cap Indonesia’s upstream net receipts at ~MYR2,800/t. But it will boost Indonesia downstream players’ price competitiveness vis-à-vis Malaysia’s players.
Overall, integrated companies in Indonesia such as First Resources (SGX:EB5), KLK, SDPL and Wilmar (SGX:F34) will be relatively better off. POSITIVE sector call maintained.

Indonesia’s CPO Fund (funded by Indonesia’s export levies) is in a deficit now due to the heavy subsidy required to sustain its B30 mandate following widened POGO spread that requires > USD500/t of subsidy for palm biodiesel blend. In response, Indonesia’s MoF revised the export duty structure in order to raise more funds.
The new structure, effective 10 Dec, involves increasing export levies by up to USD15/t for CPO and USD12.5/t for palm products for every USD25/t increase in CPO price which replaces the existing flat rate of USD55/t for CPO and USD25-35/t for palm products.

With MoF’s Dec CPO reference price pegged at USD870.77/t, CPO exports from 10 Dec will attract a total of USD213/t in taxes (export levy: 180/t plus export duty: 33/t). As a comparison, exports of RBD PO will only attract USD130/t in CPO export levy (and zero export duty).
Indonesia’s refiners get to keep the differential export taxes of USD83/t as margins (USD213/t less 130/t; vs current margin of USD63/t) and this will make Indonesia refiners very competitive vis-à-vis Malaysian refiners in the export market.
Overall, Indonesia’s integrated players will be better off than pure upstream growers. This new export levy does not come as a complete surprise to us as the physical market has priced it in with the net CPO price received by Indonesia upstream at ~MYR2,800/t since early November.

Malaysian upstream planters’ net receipts will be incrementally better than Indonesian upstream planters at higher CPO prices. Note that Malaysia has progressive taxes too whereby upstream will incrementally pay more taxes via windfall tax, export duty and State taxes;
On a relative basis, the Indonesian integrated players will be relatively better off than Indonesian upstream although the net receipts will still be lower than existing export levy rate.

Indonesia’s upstream will “suffer” the most as the upside of CPO ASP is effectively capped at ~MYR2,800/t under the new levy;
Malaysian refiners will also be the big losers as exports of Malaysia refined palm products will be uncompetitive vis-à-vis Indonesian refiners.
Over the past 4 years, Malaysia’s exports of processed palm oil were 80% of total exports; vs 20% of CPO exports. The Malaysia government needs to come up with counter-measures within 3-6 months or risk seeing a quick build-up on Malaysia MPOB stockpile (which the market tracks for price discovery) and perhaps a sharp CPO price correction by mid-2021.
One short term solution is to extend the CPO export duty exemption to capitalize on India’s 10-ppts import duty cut (see report: Regional Plantations - Maybank Kim Eng 2020-11-29: India’s Cut Of CPO Import Duty Will Boost CPO Demand).

Ong Chee Ting CA Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-12-04

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