Indonesia has imposed a new rule that makes it mandatory for local palm oil producers to sell 20% of their output to domestic refiners at fixed prices. The rule will take effect starting today. The Domestic Market Obligation requirement comes as the global largest palm oil producer is in a bid to curb a rise in domestic cooking oil prices that have climbed about 40% YoY. The unfavorable move will be negative for Malaysian upstream players that have significant exposure in Indonesia as they are required to sell a portion of their CPO products at a steep discount. Following the news, CPO futures rallied to a fresh record intraday high of RM5,700/mt before paring gains to close at RM5,587/mt. Maintain Neutral on the plantation sector.

• Tightening palm oil supplies in the global market. Indonesia is forecasted to export 33.2m mt of CPO and palm kernel products for 2022. With the new restrictive policy in place, there will be a cut in Indonesian palm oil exports in the subsequent months as about 6.6m mt or 12% of palm oil supplies will be wiped out from the global export markets. This should result in further tightening of global palm oil supply, which is already affected by the lack of new planting activities in recent years.

• Implementation of Domestic Market Obligation. The Indonesian authorities has imposed a mandate, which requires 20% of the palm oil exports to be sold domestically at a price ceiling of 9,300 rupiah (USD0.65)/kg for CPO and 10,300 rupiah (USD0.72)/kg for palm olein. The capped prices will see palm oil products to be sold domestically at steep discounts of RM2,715/mt for CPO and RM3,024/mt for palm olein. It is worth noting that Malaysian CPO and palm olein prices currently stand at RM5,700/mt and RM5,717/mt, respectively. The trade ministry expects the new policy to remain until cooking oil prices return to a stable condition like before.

• More disadvantage moves for upstream players. Coupled with the hefty CPO export tax and excise levy in Indonesia, the latest trade policy will likely to further widen the average recorded CPO prices between Malaysia and Indonesia. This will be negative for Malaysian palm oil players, namely, TSH, KLK, Sime Darby Plantation and Genting Plantation that have significant footprint in Indonesia, as they will not be able to fully capture the benefit of current strong CPO prices.

Source: PublicInvest Research - 3 Feb 2022