• Bloomberg reported that Indonesia will increase the maximum levy on palm oil exports in line with higher global prices. CPO export duties will be raised to US$675/tonne from US$375/tonne currently.

• We think that the highest CPO export duty of US$675/tonne would be applicable when CPO prices exceed US$1,500/tonne (RM6,294/tonne). Indonesia will also revoke the domestic market obligation (DMO) ruling.

• By revoking the DMO and raising the CPO export tax, we believe that Indonesia is allowing refiners or processors to export palm products freely. However, the exporters would have to pay a higher CPO export tax.

• The scrapping of the DMO would increase the supply of CPO in the market. Companies would be allowed to export more CPO instead of keeping 30% of their production for the domestic market. The increase in palm supply is negative for CPO prices.

• As for higher CPO export taxes, assuming that CPO prices stay above RM6,200/tonne, this means that Indonesia may be imposing the maximum CPO export tax of US$675/tonne in April. Yesterday, price of CPO for April delivery closed at RM6,553/tonne while June delivery was RM5,936/tonne.

• In March based on a reference price of US$1,432/tonne, Indonesia's CPO export tax was US$200/tonne while the CPO export levy was US$175/tonne. At a CPO export tax of US$675/tonne and CPO export levy of US$175/tonne, total taxes would come up to US$850/tonne (RM3,567/tonne). This means that the price difference between CPO in Malaysia and Indonesia may widen to more than RM3,000/tonne from RM1,000/tonne currently.

• The practice is the cost of CPO export tax and levy would be passed down from the refiners or exporters to the upstream companies in the form of lower selling price of CPO.

• However, as the cost of CPO export tax and levy could balloon to more than US$800/tonne, it is unknown if the exporters/refiners would still pass the entire cost of the taxes to the upstream companies or help absorb some of the cost.

• Companies with downstream operations in Indonesia would benefit from the scrapping of the DMO and lower cost of CPO resulting from the higher CPO export levy. These include KL Kepong and Sime Darby Plantation.

• However, upstream companies in Indonesia would lose out due to the widening of the price difference between CPO in Malaysia and Indonesia. These include KL Kepong, Sime Darby Plantation, TSH Resources and Genting Plantations.

• We remain Underweighted on the plantation sector.

Source: AmInvest Research - 18 Mar 2022