Regional Plantation - Maybank Research 2022-03-18: A More Realistic Solution But At The Expense Of Growers?

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Regional Plantation - A More Realistic Solution But At The Expense Of Growers?

Maintain NEUTRAL on the sector

  • If the proposal to raise Indonesia’s CPO (crude palm oil) export levy materialize, Indonesian based upstream growers’ CPO net receipts will probably be worse off whenever global prices exceed US$1,000/t. Using 16 Mar as an illustration, we estimate their CPO average selling price (ASP) would be lower by US$158/t under the new proposal.
  • As details remain sketchy, we make no changes to our forecasts for now. Meanwhile, removing the export curbs may pressure CPO prices in the near term. Preferred BUYs: KL Kepong, Ta Ann & Bumitama Agri (SGX:P8Z).

Proposal to raise maximum export taxes to US$675/t

  • In its bid to resolve the shortage of domestic cooking oil ahead of the Lebaran festivities, the Indonesia government has again surprised the market with yet another proposal. According to media reports, the domestic market obligation (DMO) and domestic price obligation (DPO) will be removed in favour of a higher export tax and levy, in line with higher global prices. The maximum CPO export levy and duties will be increased to US$675/t (from US$375/t).
  • Basically, for every US$50/t increase in CPO price, the export levy will be raised by US$20/t until it reaches the new maximum rate. The Indonesia government will add a new bracket for CPO prices of between US$1,000/t and US$1,500/t.
  • With the revision, the maximum CPO levy and export duty will be implemented when prices hit US$1,500/t or above. However, it is unclear if similar tax increases will be applicable to other processed palm oils (although based on our industry source, the government is mulling higher taxes for downstream products too although no details were made available now).

Indonesia government will subsidise bulk cooking oil

  • We believe the government is raising the CPO export levy to help fund the much needed cooking oil subsidies. According to media reports, the Indonesia government is allocating IDR7.28tr (~US$500m) from the palm oil exports levy to subsidise the bulk and unbranded cooking oil.
  • Each month, about 202m liters of cooking oil will be subsidized for 6 months to keep prices at or below IDR14,000/liter. The subsidy value is estimated to be ~IDR6,398/liter (much higher than our initial estimates, perhaps to cover the distribution cost to remote areas across the entire archipelago) and will be reviewed every two weeks.

Growers may just end up with lower net CPO ASP

  • We believe the new proposal will be a better quick fix (than the DMO and DPO schemes given the fragmented nature of the industry) to Indonesia’s woe. However, if the proposal goes through, the theoretical net receipts of growers will be lower if CPO price goes above US$1,000/t.
  • For instance, on 16 Mar 2022 the Bursa Malaysia Derivatives (BMD) 1-month FCPO was MYR6,899/t (or US$1,647/t). At this price, the new export taxes will be maxed out at US$675/t, translating to a net receipt of just US$972/t (i.e. 1,647 less 675) compared to the actual domestic CPO price achieved of IDR16,161/kg (or US$1,129/t). This means growers will be receiving US$157/t less if this is retrospectively applied (on 16 Mar).

Ong Chee Ting CA Maybank Research | https://www.maybank-ke.com.sg/ 2022-03-18
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