Indonesia’s temporary suspension of palm oil export levy will immediately increase domestic crude palm oil (CPO) and fresh fruit bunches (FFB) prices, according to UOB Kay Hian (UOB KH) analysts Leow Huey Chuen and Jacquelyn Yow.
Indonesia had announced the temporary suspension of the levy from July 15 to August 31 to boost exports and increase domestic prices. The analysts believe this move is also an effort to bring up domestic CPO and FFB prices to ease the pressure on smallholders.
CGS-CIMB Research analysts Ivy Ng Lee Fang, Peter Sutedja and Nagulan Ravi said the announcement did not come as a surprise, as the Indonesian government has indicated its plans to cut the levy since July 6 and is part of a series of measures taken to clear the current high palm oil stocks in Indonesia.
According to the Indonesia Palm Oil Association (GAPKI), its palm oil inventory level was 7.2 million tonnes as at May 22, exceeding its record high for two consecutive months. This is well within UOB KH’s and market expectations.
“As of last Friday, Indonesia has issued 2.84 million tonnes of palm oil export permits based on the domestic market obligation (DMO) and the Flush Out programme. But the actual utilisation of this permit is still lagging behind due to a logistic bottleneck,” the UOB KH analysts added.
Based on GAPKI’s numbers, palm oil production came in 20% lower m-o-m in May this year. UOB KH’s analysts pointed out that this differs from market expectations, as historical data shows that May to September are usually the peak production season in Indonesia.
See also: RHB initiates coverage on CSE Global with ‘buy’ call with TP of 58 cents
“Although May 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 FFB that are not being able to be processed by millers in May and June.
“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,” they add.
The Indonesian government had also suggested FFB selling prices to be at least IDR1,600 per kg in early June. CPO millers are likely to incur losses, especially for those who need to commit to DMO which resulted in a lower milling utilisation rate, said UOB KH’s analysts.
See also: Suntec REIT biggest beneficiary from MAS’s ‘looser’ leverage, ICR rules: OCBC
Based on UOB KH’s estimate, CPO millers may face a potential operating loss of US$10-US$20 per 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.
UOB KH analysts explained that Indonesia’s domestic selling prices are net of the export levy and export duty — all taxes are borne by upstream producers. Based on CPO FOB prices of US$1,250 per tonne, the effective net selling price for CPO would be about US$762 per tonne before the suspension of the levy. After the suspension, the net price would be about US$962 per tonne.
“Not only does this change increase CPO prices, it will translate into higher FFB prices as well. Over the last two weeks, FFB prices were hovering at IDR1,200-IDR1,300 per kg which is below the cost of production for farmers,” they add.
The analysts believe 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 crop losses in Indonesia and Malaysia.”
Overall, CGS-CIMB analysts are positive on the short-term levy waiver as it will encourage palm oil producers to take advantage of the zero rate to export as much palm oil from Indonesia before August 31, alleviating the shortages ahead of the peak production season.
“In our view, the levy exemption of US$200 per tonne for July is significant from an exporter perspective as it represents a 41% discount from the total CPO export tax and levy of US$488 per tonne for July (prior to the change). The lower levy coupled with increased export permits for palm oil is crucial to ensure exports rise in the coming months,” they add.
The analysts believe the measure will boost CPO prices in the medium term when stocks are successfully reduced to a “more comfortable” 4 million to 5 million tonnes. “Overall, we believe the market will turn more constructive on plantation companies with exposure to Indonesian estates once palm oil stocks in Indonesia fall to more manageable levels,” said the analysts at CGS-CIMB.
To stay ahead of Singapore and the region’s corporate and economic trends, click here for Latest Section
UOB KH has a “buy” call on Wilmar International and “hold” calls on Bumitama Agri and First Resources. Their target prices for Wilmar, Bumitama Agri and First Resources are $5.50, 65 cents and $1.70 respectively.
Meanwhile, CGS-CIMB has an “add” call on Wilmar and “hold” calls on Golden Agri-Resources and First Resources. Their target price for Wilmar, Golden Agri and First Resources are $5.69, 30 cents and $2.10 respectively.
As at 10.30am, shares in Wilmar, Bumitama Agri and First Resources are trading at $4.05, 59.5 cents and $1.37 respectively.
