Recent news from The Edge reported that the Indonesian government is planning to reduce its CPO export tax to offset the burden from its plan to impose export levies of USD50/MT for CPO and USD30/MT for processed palm oil (PPO). The government will not change the price threshold on their export tax at USD750/MT. As the USD50/MT levy is yet to be confirmed, we expect both Indonesia and Malaysia to start off May 2015 with zero export duties. We think the levy should be approved after mid-May, which could result in sharply restricted Indonesian export and therefore potentially boost Malaysian CPO exports. We believe Indonesian downstream players are the main beneficiaries of this move, with PPB (MP; TP: RM15.42) to benefit from Wilmar’s heavy downstream exposure in Indonesia. We expect the positive impact to Wilmar’s refining margins from the levy to outweigh lower export tax rates. However, we maintain our call/TP pending final approval of the levy. We maintain our NEUTRAL outlook on plantations as current zero export tax regimes could result in temporary soft CPO prices, though approval of the levy could be positive for Malaysian CPO exports and CPO prices. No change to our recommendations: OUTPERFORM on TAANN (TP: RM4.44) and MARKET PERFORM on SIME (TP: RM9.64), PPB (TP: RM15.42), FGV (TP: RM2.21), IJMPLNT (TP: RM3.57), TSH (TP: RM2.30), UMCCA (TP: RM6.61) and CBIP (TP: RM2.32). Maintain UNDERPERFORM on IOICORP (TP: RM4.40), KLK (TP: RM20.34), and GENP (TP: RM9.57).

Indonesia plans to cut palm oil export tariff. The Edge reported that Indonesia plans to reduce its crude palm oil (CPO) export tax to help offset the cost burden for companies from a plan to impose separate export levies. Earlier this month, the government said it would issue a regulation requiring exporters to pay a levy of USD50 on every tonne of CPO exported and USD30 for processed palm oil product exports to fund new biodiesel subsidies. The government now intends to cut the export tax rate. They mentioned that the current tariff will be adjusted so that the sum the companies pay would not be too high. The export tax currently ranges from 7.5% to 22.5%, depending on benchmark palm oil prices. They added that the government will not change the price threshold for the tax, which only takes effect when prices rise above USD750/MT.

However, USD50/MT levy is yet to be confirmed. As of today, we gather that the USD50/MT levy is yet to be approved by the Indonesian government. Thus, we expect Indonesia’s zero-tax policy to be intact going into early-May, matching Malaysia’s own 0% export tax rate for May-15. This is in line with our expectations as CPO prices been trading at around USD600/MT, far below the USD750/MT CPO price threshold for export tax.

If the levy is approved, there will be two outcomes for Indonesian planters;

(i) When CPO price is below USD750/MT, export tax will be flat at USD50/MT, implying a heavier margin squeeze on Indonesian CPO exporters which will result in them retaining more CPO for domestic usage,

(ii) When CPO price is at or above USD750/MT, the Indonesian government intends on lowering the current export tax structure, which we expect to remain at a minimum of USD50 equivalent.

a. We believe USD50/MT levy represents a tax ‘floor’ because the taxes collected through levy and export taxes are to be utilised for biodiesel subsidies.

b. Hence, we think Indonesia could only revise down the tax structure starting rate to 6.7% vs. current 7.5% at CPO price of USD750/MT in order to maintain at least USD50/MT of tax collected.

We expect the proposed Indonesian CPO levy to be approved after mid-May. We think the levy could strongly restrict Indonesian exports going forward, especially as CPO prices decline. Hence, we believe the Indonesian levy will be positive for Malaysian CPO exports. 

Source: Kenanga Research - 28 Apr 2015