Widened domestic price gap between Indonesia & Malaysia
MY-centric growers are clear beneficiaries
Domestic CPO price gap has widened further (see Figs.1-2) between Indonesia (ID) and Malaysia (MY) post ID’s new export ruling that came into effect on 27 Jan. 1M FCPO in MY (ie a proxy of global export prices) was up 1.8% WoW while ID’s domestic CPO price was down 2.8% WoW. The relatively more MY-centric growers such as IOI, SOP, BPLANT, TAH, THP, HAPL, and FGV are clear beneficiaries. Stay POSITIVE on the sector. Preferred BUYs remain with KLK, SOP and BPLANT.
ID to allocate 20% of export volume for DMO
Recall that on 27 Jan 2022, ID’s trade minister Muhammad Lutfi said that exporters must set aside 20% of their shipments for domestic market obligation (DMO). The rule took effect on 27 Jan. The aim is to ensure sufficiency of cooking oil in the domestic market at affordable prices. At the same time, the ID government has also capped the prices of local CPO at IDR9,300/kg (USD0.67) and Olein at IDR10,300/kg, way below ID’s domestic CPO price of IDR15,361/kg (on 27 Jan). The government also capped cooking oil prices from as low as IDR11,500/kg (for bulk oil) to as high as IDR14,000/kg (for premium oil) in the domestic market. The trade minister expects ID’s cooking oil demand to be ~5.6mt in 2022. At the same
time, we understand the ID government has also stopped the subsidy of cooking oil using the export levies collected effective 1 Feb 2022. [Positively, this means the CPO Fund from export levies collected will be mostly used to ensure the sustainability of B30 mandate or possibly even higher mandates in the future.]
ID’s export volume may not be significantly affected
According to media report, the Indonesian Palm Oil Association (GAPKI) does not expect the new policy to affect ID’s export volume. GAPKI has earlier expected ID’s palm oil exports to drop by just 1mt (-3% YoY) to 33.2mt in 2022 in anticipation of higher domestic consumption. Nonetheless, GAPKI believes the new export policy may disrupt exports in February but total exports may not decline much. And by March, exporters would have adjusted their volumes to comply with the rule.
MY-ID CPO price gap widened to MYR1,378/t on 3Feb
Since the announcement of ID’s new policy, 1M FCPO on BMD rose 1.8% WoW to MYR5,714/t (on 3 Feb) but off its record high price achieved of MYR5,803/t on 28 Jan on concern over lesser availability of palm oil in the export market. While CPO price trended higher in MY, domestic CPO price in ID fell 2.8% WoW to IDR14,930/kg (on 3 Feb; see Fig.1). This implies that the ID growers are sharing the burden of subsidizing the domestic cooking oils prices. Positively, the overall impact was considerably smaller than
Maybank IBG’s estimates as we had expected ID CPO prices to theoretically adjust down to ~IDR14,000/kg last week. We suspect the ID refiners are sacrificing some of their refining margins too. Post 27 Jan, the domestic CPO price gap between MY and ID has widened by MYR246/t (from MYR1,132/t on 27 Jan) to MYR1,378/t on 3 Feb – see Fig.2. This new policy has inevitably benefited MY growers in the short term with higher CPO prices.