Indonesia’s plans to raise levy on palm oil products bad for CPO producers

Indonesia’s move to increase its export levy on palm oil products will be negative for crude palm oil (CPO) producers. 

CGS-CIMB Research analyst Ivy Ng stated the plans to increase the export levy on palm oil producers could see palm oil producers needing to pay an additional export levy of US$160/tonne (+43%) based on Indonesia’s CPO reference price of US$1,432 (RM6,004)/tonne for March. 

“We estimate this will raise the total export tax and levy to be paid for CPO exports to US$535/tonne from US$375/ tonne, representing an effective export tax and levy rate of 37% versus 26% previously. 

“The local CPO price in Indonesia of 16,161 Indonesia rupiah/kg (or RM4,740 per tonne) as at March 16, 2022, appears to only partially reflect the higher export levy and tax as it trades at RM2,155 per tonne to Malaysia’s CPO price of RM6,895 per tonne. 

“The Indonesia price discount against Malaysia is below the theoretical potential discount of US$575/tonne if the new export levy comes into effect on April 1 and based on the CPO reference price of US$1,500/ tonne or more,” she wrote in a research note last week. 

CGS CImb remains ‘Neutral’ in the agribusiness sector in the Asean region. 

It was previously reported that Indonesia will remove export volume restrictions on palm oil products and raise its export levy instead which came as a surprise policy U-turn just a week after the republic shocked markets by further tightening its curbs. 

Ng noted Indonesia had required exporters/plantation companies to sell 30% of their planned export volume of palm oil products in the domestic markets, up from 20% imposed in January under its domestic market obligation (DMO) rule. 

The DMO is an initiative aimed at ensuring sufficient local supply amid soaring cooking oil prices. 

However, in a recent parliamentary hearing, Indonesia’s Trade Minister Muhammad Lutfi said the policy has resulted in supply scarcity and the DMO will be withdrawn. The regulations were agreed to and approved last Thursday. 

“We turn less bullish on Indonesian producers as their ability to benefit from the current high CPO price will be affected by the higher export levy, based on our estimates. 

“However, this will not significantly affect our financial year 2022/2023-2024F earnings forecasts, which assume a CPO price of US$1,146/US$900 per tonne,” she added. 

The benchmark CPO futures contract on Bursa Malaysia Derivatives Bhd closed RM304 lower at RM5632 a tonne last Friday as traders took profit on lower crude oil prices and news of the release of stocks by the Chinese government to manage CPO prices. 

The contract price was down RM1,078 a tonne weak-on-week. 

The Malaysian Reserve

Tags: products, levy, CPO, export, Indonesia, palm oil, futures, tax