WHILE the latest move by Indonesia to scrap its domestic market obligation (DMO) policy on palm oil exports and replace it with export duty hikes is positive for crude palm oil (CPO) prices as this would result in tighter global palm oil supplies, it will not augur well for Malaysian planters with vast Indonesian operation/interest.
On the positive front to Malaysia-centric planters, PublicInvest Research expects the higher CPO export taxes to discourage Indonesian palm oil producers from exporting their CPO supplies, hence causing a sharp decline in Indonesian palm oil exports in the next couple of months.
“It will also result in a wider gap between Malaysian and Indonesian palm oil prices due to the hefty tax differential,” opined analyst Chong Hoe Leong in a plantation sector outlook.
“The news is positive for the CPO prices as it would result in tighter global palm oil supplies. Maintain “overweight” on the plantation sector.”
Following the latest move, the combined ceiling of Indonesia’s palm oil export tax and levy would be raised from US$375/metric tonne (MT) (RM1,556/MT) to US$675/MT (RM2,801/MT) while levies for refined palm oil products are kept unchanged.
The maximum CPO tax would be applied when CPO prices reach US$1,500/MT (RM6,225/MT). Based on the current CPO price of RM6,895/MT, Indonesian palm oil exporters will be subject to the maximum CPO duty of US$675/MT (RM2,801/MT).
“To avoid the hefty duties, most Indonesian plantation exporters are likely to sell their CPO to local refiners with some discounts,” suggested PublicInvest Research. “Indonesia’s CPO exports are likely to see a steep decline this year compared to 2021’s 2.48 million MT.”
Following the latest policy, PublicInvest Research expects pure upstream players in Indonesia to be the losers due to the hefty export duties while local refiners are the winners as they have better bargaining power.
“Meanwhile, based on the current CPO price of RM6,895/MT, the CPO price differential between Indonesia and Malaysia further widens to USD543/MT (RM2,253/MT) from USD384/MT,” added the research house.
RHB Research concurred that the net impact to Indonesian planters is slightly negative. “Based on the new tax range, the net realisable price for planters would range from -1 to -5% if we were to compare current tax levies to the old tax levies plus a 30% DMO impact,” projected analyst Hoe Lee Leng.
“However, Indonesian planters with a downstream presence should be able to gain slightly from this as they could buy feedstock at lower prices while benefitting from the lower tax rate for refined products.”
Reiterating its “neutral” stance on the plantation sector, RHB Research noted that while it is not certain if CPO prices will rise as a result of this move, the net impact for pure planters with Indonesian exposure would be slightly negative.
“We continue to prefer pure Malaysian planters like Sarawak Oil Palms Bhd and Ta Ann Holdings Bhd as well as Indonesian planters with downstream exposure like Kuala Lumpur Kepong Bhd,” added the research house. – March 18, 2022
