KUCHING: With the Indonesian government having begun the collection of crude palm oil (CPO) and processed palm oil levies on July 16, analysts believe the impact on CPO prices is neutral but expect Malaysian exports to benefit due to lesser supply coming from Indonesia.
Based on the research arm of Kenanga Investment Bank Bhd’s (Kenanga Research) channel checks, the authorities there have indeed started collecting the US$50 per metric ton (MT) CPO levy and US$30 per MT processed palm oil (PPO) levy.
Kenanga Research noted The Jakarta Post had stated that the Indonesia Oil Palm Estate Fund (BPDP) aims to “generate between 3.5 trillion rupiah and 4.5 trillion rupiah (circa US$261.9 million to US$336.7 million) up to the end of this year from palm oil shipments”.
The research arm further noted that the agency first “plans to replant at least 2,000 hectares (ha) of oil palm plantations run by smallholders” for around 60 million rupiah per ha or circa US$4,500 per ha. It added that their next priority is to subsidise biodiesel by another 600 to 700 rupiah per liter (US cents 4.5 to 5.2 per liter) to help domestic consumption reach 1.8 million to two million kiloliters (KL) in the next four months, with 2015 targeted total consumption of 5.2 million KL.
Kenanga Research was neutral on the CPO price impact as the levy has long been anticipated by the market since it was introduced in May 2015.
As highlighted in its recent Sector Update, the research arm expected the Indonesian levy to boost up Malaysian exports in the latter half of July 2015.
Thus, Kenanga Research revised its July 2015 export forecast up to 1.71 million MT, up one per cent month on month (m-o-m) from 1.68 million MT.
Accordingly, the research arm also lowered its July 2015 closing inventory forecast to 2.13 million MT (-1 per cent m-o-m) from 2.18 million MT.
“Note that our new forecast indicates lower July 2015 inventory against June 2015 (2.15 million MT),” it said.
Kenanga Research thought that the key beneficiary from this measure is the Indonesian downstream industry, where PPB Group Bhd’s (PPB) associate Wilmar operates 25 refineries and nine biodiesel plants as of 2014.
The research arm Noted that other companies under its coverage with refinery operations in Indonesia include SIME Darby Bhd (SIME) and Kuala Lumpur Kepong Bhd (KLK).
“Based on latest CPO prices at circa US$575, the US$50 per MT CPO levy implies taxation of 8.7 per cent, compared to zero per cent tax imposed before the levy was implemented. Higher export tax rates generally translate to better margins for refiners due to better bargaining power against upstream producers,” it said.
Hence, the research arm thought the news could lead to recurring interest in PPB which share price has been stagnating in the last few months while the levy implementation was delayed.
Meanwhile, Kenanga Research estimated the levy could collect an amount of US$250 to 300 million in 2015, within the lower end of the BPDP forecasted range.
Assuming 40 per cent of the funds is used for subsidies at 600 to 700 rupiah per liter, the research arm calculated that 2.2 to 2.6 million KL (or 1.8 to 2.2 million MT) of biodiesel could be subsidised by the BPDP.
“We think this is likely to be applied on top of the existing 1.7 million KL, or 1.4 million MT, of subsidised biodiesel as budgeted by the Indonesian government earlier this year,” it said.
Kenanga Research noted that unsubsidised biodiesel production is not economically viable currently because CPO price at circa US$580 per MT is higher than both Brent crude oil (US$440 per MT) and gasoil prices (US$545 per MT).
Since the subsidised 1.7 million KL is only 0.1 million KL above 2014 domestic consumption and far below targeted consumption of 5.2 million KL (or 4.3 million MT), the research arm thought that CPO price will not appreciate substantially until stronger evidence such as mandated enforcement and infrastructure development are seen.
Kenanga Research has thus maintained its ‘neutral’ call on plantations with an unchanged FY15-16E CPO price forecasts of RM2,200 to RM2,400 per MT.
While the research arm expected the levy to help boost Malaysian CPO exports, it expected minimal near term inventory impact (-1 per cent m-o-m) post its revised estimates due to rising production.
“In the short-term, we expect the move to favor planters with Indonesian refining operations, chiefly PPB due to its 18 per cent stake in Wilmar.
“Long-term impact is neutral as we think the additional subsidy only supports the existing budget, and a lack of infrastructure and enforcement could limit domestic biodiesel growth,” Kenanga Research said.