Regional Plantation - UOB Kay Hian 2022-03-18: Flip-Flopping On Domestic Market Obligation (DMO) Policy

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

Regional Plantation - Flip-Flopping On Domestic Market Obligation (DMO) Policy

• The Indonesian government announced the demolishment of the domestic market obligation (DMO) policy yesterday, along with an increase in the CPO export levy in order to subsidise household unbranded cooking oil. In the past, when Indonesia increased exports levy, CPO prices rose on the excuse that higher prices would compensate for the higher levy.
• But with the weak demand sentiment now, CPO prices may not see a positive reaction. This would burden Indonesian upstream players as they would need to bear the export levy. Maintain MARKET WEIGHT.

The flip-flopping.

• The Indonesian government had made a few announcements for the palm oil products in order to secure domestic supplies of domestic cooking oil. The latest changes are as below:
  1. On 16 Mar 22, it announced the removal of domestic price obligation (DPO) and only set Rp14,000/litre for household bulk cooking oil. The price difference between the actual market price and price control will be subsidised by funds collected from the export levy.
  2. On 17 Mar 22, it announced the demolishment of the domestic market obligation (DMO) for palm oil products, meaning that all export volume restrictions on palm oil products will be removed.
  3. The CPO export levy was raised, effective 18 Mar 22. The maximum total crude palm oil export duties will be increased to US$675/tonne (still awaiting final confirmation) from the current US$375/tonne. The Indonesian government had also added a new bracket for CPO prices of between US$1,000-1,500/tonne.
  4. Allocation of Rp7.28t from CPO fund to subsidise bulk and unbranded cooking oil. Each month, about 202m litres of cooking oil will be subsidised for six months to keep prices at or below Rp14,000/litre.

Comments

• Weakness in CPO prices. By removing the domestic market obligation (DMO) for palm products, we reckon that this would allow for more global palm oil supply which may soften the international CPO pricing. Indonesia’s palm oil exports account for about 65% of its total palm oil production, whereas the domestic consumption for food products only contribute about 15% of its total palm oil production. We reckon that the shortage of cooking oil in Indonesia was mainly due to the pricing and marketing strategy taken by the cooking oil producers as most of the cooking oil producers and refiners are suffering with thin or negative operating margin.
• Impact from higher CPO levy. The Indonesian upstream players would suffer the most impact as they are the ones who bear the export tax and levy. With the export levy structure being effective from 18 Mar 22, the Indonesia’s CPO reference price for Mar 22 is at US$1,432/tonne, and the CPO export levy and duty will increase from US$375/tonne to US$535/tonne. Based on our estimation, the CPO reference price for Apr 22 will be US$1,700/tonne or higher and hence the maximum duty and levy will be S$575/tonne.
• Maintain MARKET WEIGHT. Even though we reckon that we might see some weakness in CPO prices, thanks to the U-turn policy by the Indonesian government on DMO and the hike in CPO export levy, we reckon that CPO prices are unlikely to see a sharp correction in 1H22 in view of the global vegetable oil tightness.
• We reckon that the pure upstream Indonesian players would get impacted the most from Indonesia’s changes on DMO and the export levy structure. Companies under our coverage would be Bumitama Agri (SGX:P8Z), London Sumatra and Triputra Agro.
• Integrated companies with Indonesia exposure under our coverage, First Resources (SGX:EB5), Astra Agro Lestari, Kuala Lumpur Kepong, Genting Plantations, Sime Darby Plantations and IOI Corporations will also be affected with lower upstream margin. Downstream margin would remain stable, where the export levy on refined products is still lower than CPO.
• We had provided the companies’ exposure in Indonesia and the scenario studies of the impact on companies’ earnings and net CPO ASP after implementing the changes on the export levy structure based on the percentage of companies’ exposure in Indonesia.

Sector Catalysts

• Increase in US soybean planting area. The US Department of Agriculture expects farmers to plant 88m acres of soybeans for 2022, up by 0.8m acres from 87.2m acres in 2021. This may result in higher-than-expected soybean production in the market for 2022, and hence, we might see some price weakness in soybean oil moving forward.
• Prolonged Russia-Ukraine war could further tighten the global oilseed and vegoil supplies and this would prolong the upcycle in vegoil prices. Ukraine and Russia are entering the critical month of sunflower planting which should start in April, and the prolonged war could hamper the coming planting season. Ukraine’s and Russia’s sunflower oil exports account for 10% of global vegoil exports.

Leow Huey Chuen UOB Kay Hian Research | Jacquelyn Yow Hui Li UOB Kay Hian | https://research.uobkayhian.com/ 2022-03-18

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