• Bloomberg reported that the Indonesia government is now requiring palm oil exporters to allocate 20% of their shipment volume for local supply. The selling prices under the domestic market obligation rule are 9,300 rupiah (US$0.65) per kg for CPO and 10,300 rupiah for olein.

• The restriction on export volumes is not new as it was first reported in the press a few weeks ago. The news that Indonesia may restrict its exports have been pushing CPO prices up in the past few weeks. Yesterday, the price of CPO for February rose by RM47/tonne to RM5,660/tonne while April delivery increased by RM42/tonne to RM5,486/tonne.

• Previously, we thought that the mandatory local portion would be based on Indonesia's annual CPO production. Under the ruling however, the allocation of 20% is based on shipment volumes. Based on 20% of shipment volumes instead of production, it appears that the allocation for the domestic market would be smaller than expected. Hence, there is more room for exports.

• According to GAPKI, Indonesia's exports of palm products amounted to 37.2mil tonnes in 2021. According to Intertek however, the country's exports of processed and crude palm oil were 18.2mil tonnes in 2021.

• If we assume a 5% growth to GAPKI's 2021 export numbers, the local portion would come up to 7.8mil tonnes. If the mandatory local portion had been based on CPO production, the local allocation would have come up to about 9.5mil tonnes.

• Currently, Oil World is forecasting Indonesia's CPO production to increase by 1.7mil to 1.9mil tonnes in 2022F (2021E: 45.3mil tonnes). GAPKI is expecting Indonesia's CPO output to be 48mil tonnes in 2022F vs. 46.7mil tonnes in 2021.

• We believe that news on the restriction on export volumes has already been reflected in the surge in CPO prices. As such, we reckon that there is more downside than upside to CPO prices. In spite of the recent rise in CPO prices, share prices of plantation companies remained lacklustre dragged by ESG concerns. Hence, we maintain NEUTRAL on the plantation sector.

Source: AmInvest Research - 28 Jan 2022