by PRIYA VASU / pic by MUHD AMIN NAHARUL

MALAYSIAN integrated palm oil plantation companies with operations in Indonesia are likely to survive unscathed from the potential introduction of Indonesia’s export levy, said Maybank Kim Eng Research.

Although the Indonesian government is still deliberating on a potential revision to its export levy on crude palm oil (CPO) to raise funds to sustain its B30 mandate, the physical market (~RM2,800 a tonne) in Indonesia has reflected the proposed new levy since early November, which is rather punitive on the upstream.

“Integrated companies in Indonesia such as Kuala Lumpur Kepong Bhd (KLK), Sime Darby Plantation Bhd, Boustead Plantations Bhd and Wilmar International Ltd should be relatively better off under current conditions,” said analyst Ong Chee Ting.

He placed a ‘Buy’ call on KLK, Sime Darby and Boustead Plantation, and called for a ‘Sell’ on Genting Plantations Bhd.

Indonesia’s persistence to keep its B30 mandate lowered its stockpile amid weaker than expected 2020 output in Indonesia.

Lower stockpile has sustained price of CPO above RM3,000 a tonne level since early November.

“On the flip side, the CPO fund (funded by its export levy) which subsidises Indonesia’s B30 mandate is now near zero as the current wide palm oil-gas oil spread that requires more than US$500 (RM2,045) a tonne of subsidy for every tonne palm biodiesel blended has exhausted the fund,” said Ong.

Based on a latest chatter, the new proposal involves increasing export levies by up to US$15 a tonne for CPO and US$12.50 a tonne for palm products for every US$25 a tonne increase in CPO price.

“This progressive levy structure will replace the existing flat rate of US$55 a tonne for CPO and US$25-US$35 a tonne for palm products,” added Ong.

He further noted that while the Indonesian government is still mulling the new levy proposal, the physical market has priced it in, as the net CPO price received by the country’s upstream has been ~RM2,800 per tonne since early November.

KPB Nusantara CPO Delivered Medan/ Dumai was quoted at RM2,877 a tonne on Nov 19 versus Malaysian Palm Oil Board’s spot price of RM3,580 a tonne.

Compared to the physical spot price in Malaysia averaging ~RM3,400 a tonne in November, the Malaysia-Indonesia discount has widened to ~RM600 a tonnne from an average of RM250 a tonne in prior months.

“We believe this is because the market is worried that if the government endorses this new levy, it may be applied retrospectively on Nov 1. This is rather punitive on upstream players, while downstream players seem to be the immediate beneficiary as palm olein prices were reported to have held up well at ~RM3,494 per tonne on Jakarta Futures Exchange,” said Ong.

He said Malaysian upstream planters’ net receipts will be incrementally better than Indonesia’s upstream planters if the new proposal is adopted.

Note that Malaysia has a progressive tax rate, too, whereby upstream will incrementally pay more taxes to the government via windfall tax, export duty and state taxes.

On a relative basis, the Indonesian integrated players will be relatively better off than the country’s upstreams, although the net receipts will still be lower than existing export levy rate, noted Ong.

He added that the Indonesian upstream players will suffer the most as the upside to CPO price is capped at ~RM2,800 a tonne under the new levy.

“While the above proposal is not cast in stone yet, we understand the Indonesia government will make a final decision in the coming weeks. For now, we find Indonesia’s integrated players more insulated than pure upstream players” said Ong.