Temporary Suspension Of Indonesia’s Export Levy
Indonesia has announced the temporary suspension of the palm oil export levy from 15 Jul 22 to 31 Aug 22 to boost exports and increase domestic prices. The latest GAPKI press release showed that Indonesia’s palm oil inventory hit 7.2m tonnes (+75% or +3.1m tonnes ytd) as at end May 22. Suspension of the export levy will immediately increase the domestic CPO and FFB prices to ease smallholder’s pressure where some have incurred losses over the last two months. Maintain MARKET WEIGHT.
WHAT’S NEW
• Indonesia removes palm oil export levy from 15 Jul 22 to 31 Aug 22. Indonesia has removed its palm oil export levy for all products from 15 Jul 22 to 31 Aug 22 in an attempt to boost exports and ease the inventory crisis. As mentioned in our previous note, we reckon that this move is also an effort to bring up domestic CPO and FFB prices to ease the pressure on smallholders.
• As expected – Record-high inventory. The Indonesia Palm Oil Association (GAPKI) had announced that its palm oil inventory level was 7.2m tonnes as of May 22, exceeding its record high for two consecutive months. This is well within our and market expectations where the Indonesian government announced an export ban in end-Apr 22 and the reintroduction of domestic market obligation (DMO) in end-May 22 which still applies to date. As of last Friday, Indonesia has issued 2.84m tonnes of palm oil exports permits based on DMO and the Flush Out programme. But the actual utilisation of this permit is still lagging behind due to logistic bottleneck.
• Low palm oil production season in Indonesia? No. Based on GAPKI’s numbers, palm oil production came in 20% mom lower in May 22 which is different from market expectations as historical data shows that May-Sep are usually the peak production season in Indonesia. Although May 22 production may be affected by fewer working days as workers were on Lebaran break, we reckon that the production reported by GAPKI is still too low and this could be partly due to the loss of fresh fruit bunch (FFB) that are not being able to be processed by millers in May and June 22. As we highlighted in our previous note, a lot of millers and refiners are facing shortage of storage capacity, thus they are rejecting third-party FFB and focusing on own and plasma FFB only. This has led to a significant drop in smallholders FFB prices over the last two months.
• Millers might be operating at a loss. On top of that, the Indonesian government had suggested FFB selling prices to be at least at Rp1,600/kg in early-Jun 22 where CPO millers are likely to incur losses, especially for those who need to commit to DMO, which resulted in a lower milling utilisation rate. Based on our estimate, CPO millers might face a potential operating loss of US$10-20/tonne for third-party FFB purchase if they follow the government’s targeted FFB prices. This will highly impact companies that are heavily dependent on third-party FFB purchases for their milling operations.
ESSENTIALS
• Indonesia’s net CPO ASP way lower than Malaysian’s. Indonesia’s domestic selling prices are net of the export levy and export duty, ie all taxes are borne by upstream producers. Based on CPO fob prices of US$1,250/tonne, the effective net selling price for CPO would be about US$762/tonne before the suspension of the levy; after the suspension, the net price would be about US$962/tonne. Not only does this change increase CPO prices, it will translate into higher FFB prices as well (refer to RHS table). Over the last two weeks, FFB prices were hovering at Rp1,200-Rp1,300/kg which is below the cost of production for farmers.
ACTION
• CPO prices trending down but remain supported until year-end. We reckon that CPO prices would continue to be soft in the near term with more exports from Indonesia curbing its current high inventory. Having said that, we think CPO prices would still remain supported until year-end on the back of demand recovery and potentially weaker-than-expected production due to current high crops losses in Indonesia and Malaysia.
• Prefer only Malaysian players. With expectation of some earnings disappointment for Indonesian-exposed companies, mainly dragged by the palm oil policies in Indonesia, we will not be surprised if there is negative operating profit for some companies in 2Q22 or 3Q22. We recommend investors to pick only Malaysian plantation players which would still continue to benefit from the high commodity prices.
• Top pick. Our top pick would still be IOI Corporation (IOI MK/BUY/Target: RM5.15) with its highest exposure to Malaysia as well as stable high refining margin as compared with other big-cap plantation companies. We also recommend Hap Seng Plantations (HAPL MK/ BUY/TP: RM2.80) on the back of its high dividend yield of 7.9% supported by its stronger-than-peers earnings.
ASSUMPTION CHANGES
• CPO ASP assumptions. We maintain our CPO price assumptions at RM5,200/tonne and RM4,000/tonne for 2022-23 respectively.
SECTOR CATALYSTS
• Higher-than-expected US green diesel demand.
• Stronger-than-expected commodity cycle.
