Flip-flopping By Indonesia Government Again
The Indonesian government has decided to ban all exports of raw materials for cooking
oil effective from 28 Apr 22. This would lift international CPO prices with the largest
palm oil producer banning exports. We reckon this gives investors a short-term trading
opportunity for plantation companies with high exposure to Malaysia operations.
Companies under our coverage are HAPL, SOP, KIML and IOI. Maintain MARKET
WEIGHT.
WHAT’S NEW
• Indonesia has decided to ban all exports of raw materials for cooking oil, said President Joko
Widodo in a Friday briefing. The policy will be effective from 28 Apr 22 until the local
shortage is resolved.
COMMENTS
• CPO prices to strengthen with latest move by Indonesia. Last Friday, Indonesia’s
President make a surprise announcement to halt shipments of cooking oil and its raw
materials from 28 Apr 22 to address the cooking oil shortage and soaring domestic
prices. Indonesia is the world largest palm oil producer with 56% market share of global
palm oil exports and 30% market share of global exports for 17 oils and fats. This will
further tighten global vegoil supplies and push prices higher. The CPO third-month
futures contract price rose by RM155/tonne to RM6,900/tonne after the President’s
speech, 30 minutes before the market closed on 22 Apr 22.
• May see CPO price divergence between Indonesia’s domestic and international
pricing. This announcement is a total surprise to us and the market. In our opinion, the
main aim of this ban is to control the soaring cooking oil price in Indonesia. Since the
lifting of domestic market obligation and domestic price obligation in late-Mar 22, more
cooking oil was made available but at much higher prices except for bulk cooking oil at
the controlled price of Rp14,000/litre. The exports ban on cooking oil and its raw material
will lead to oversupply of CPO domestically and domestic prices will drop significantly.
Recall that Indonesia is a palm oil exporter with the domestic market only making up
approximately 35% of total palm oil production while the household cooking oil market is
estimated about 8-9% of total palm oil production.
• Trading BUY for plantation companies with pure or high exposure in Malaysia.
Rising palm oil prices will definitely benefit the Malaysia players, which will see higher
demand and higher sales volume as well. Companies with high exposure in Malaysia
under our coverage are Hap Seng Plantations, Sarawak Oil Palms and Kim Loong
Resources. Among the big cap companies, IOI Corporation has the least exposure in
Indonesia and its performance is likely to catch up.
• Will this be temporary? Based on our channel checks and data collected, we strongly
believe that the palm oil supply in Indonesia is enough for domestic consumption. Based on
the Indonesian Palm Oil Association (GAPKI) data, the domestic consumption of palm oil for
food only accounted for 19% of total Indonesian CPO production in 2021. Having said that,
we understand that some of the smaller towns/ rural areas are experiencing a lower supply
of cooking oil. We reckon that lower supply in these areas is mainly due to: a) the high food
inflation which dissuades citizens from buying cooking oil, leading to lower supply due to
lower demand, and b) longer transportation period needed to deliver into smaller towns and
rural areas. From the President’s speech, he highlighted the need to ensure the availability
of food products at home after global food inflation soared to a record high, so we reckon
that the ban would only be lifted once the issue of food inflation and food supply is solved in
Indonesia.
• The uncertainty. At the point of writing, the official document with details is not available
yet, thus we are still not certain which products are subject to this exports ban and how long
this new regulation will last. Based on the President’s speech, the ban is on cooking oil and
its raw materials. Cooking oil raw materials would be CPO, which is then refined in RBD
Palm Oil and RBD Palm Olein. Indonesia’s palm oil exports largely focus on process palm oil
which made up about 75% of 2021 exports.
ACTION
• Maintain MARKET WEIGHT. We reckon that there might be a short term trading
opportunity for companies with higher exposure in Malaysia riding on the short term pent-up
demand for Malaysia palm oil which would buoy Malaysia CPO prices further. Under our
coverage, they would be companies like Hap Seng Plantations, Sarawak Oil Palms, Kim
Loong Resources and IOI Corporations.
• Companies with Indonesia exposure may have lower average selling prices until the ban is
lifted by the Indonesian government. With this, we reckon that companies such as
Bumitama, First Resources, Astra Agro Lestari, London Sumatra, Triputra Agro earnings
would see some negative impact. Having said that, we maintain our earnings forecast for the
companies while we are waiting for further official statement from the Indonesian
government on the details.
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 for 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.