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Indonesia’s High Production Growth Is Over; However, Demand Is Not Great

CPO prices may remain elevated in the short to medium term in view of: a) lower production in 2H21, and b) biodiesel consumption possibly remaining intact despite being weaker than the initial target. Pak Togar revised his production forecast downwards due to the impact of the dry weather in 2019 and short-term labour efficiency. However, the production growth in Oct-Nov 21 is crucial; if the production starts to peak, this would continue in 2022. Maintain UNDERWEIGHT.

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WHAT’S NEW

We invited Pak Togar Sitanggang from Indonesia Palm Oil Association (GAPKI) to Indonesian Palm Oil Outlook. The key takeaways from his sharing are:

• Indonesian 2H21 production may come in weaker than expectations. Pak Togar has revised his CPO production for 2021 from 49m tonnes to 47m tonnes based on the lower 2H21 production. His initial estimate for Indonesia’s 2022 CPO production is unlikely to go beyond 50m tonnes. This was mainly due to the lingering impact of the drought in 2019 and partly due to insufficient fertiliser applications. The past weather has changed the production cycle with the peak production likely to only come in October and November and not the usual peak in September. If there are no weather disruptions towards the end of the year (weather forecast warned of 70-80% of La Nina happening in Dec 21 to Feb 22), the high production in October and November may continue into 1Q22. Another factor to monitor for
production is the potential short-term labour shortage caused by some harvesters opting to return to their hometowns after getting their COVID-19 vaccines, as they have spent 1.5 years in the estates.

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• Biodiesel consumption for 2021 will be lower than the allocation of 9.2m kl. The domestic biodiesel blending for 2021 is expected to be lower than the allocated volume of 9.2m kl and lower than 2020’s allocation of 7.2m tonnes. Pak Togar has an estimation of only 7.0m tonnes for 2021 (-2.7% yoy), which is attributable to lower traffic in the Indonesian cities due to the recent Delta variant outbreak. With the spare capacity, we see higher biodiesel exports from Indonesia. Based on latest GAPKI data, there was a total of 69,000 tonnes of biodiesel exports for Jan-Jul 21 vs 31,000 tonnes for 2020.

• Rumours on export levy revision again? There have been two voices in the market on the revision of Indonesian export levy whether there will be a revision in the near future. Pak Togar mentioned that both parties are not wrong where he highlighted that the biodiesel fund is still sufficient up to early-22, based on the current palm oil- gasoil (PO-GO) spread that is below Rp4,000/litre. However, PO-GO spread has widened to Rp5,000/litre currently and if this continues for the next three months, the government may need to relook into the export levy structure again.