SINGAPORE (Sept 25): Indonesian planters have gotten a reprieve, as the government on Tuesday announced that it will not be collecting palm oil levies for the rest of this year.
Indonesia has not collected levies for palm since December last year, due to low prices of palm oil.
Indonesia’s chief economic minister Darmin Nasution said that Indonesia will reimpose the levy on Jan 1, 2020, if prices rise over US$570/tonne, as the country will begin to use the B30 biodiesel blending mandate.
The Indonesian government rules state that levies of US$10 to US$25 per tonne should be collected from exports above US$570/tonne, while higher levies of US$20 to US$50 should be collected when prices top US$619/tonne.
Based on an estimate from the Trade Ministry, the palm reference price is at US$574.9 per tonne, which means the government should start imposing levies next month, said Nasution.
He added that the delay is a direction from the president, and reflects concern that the levies might cut into farmers’ earnings.
Ivy Ng Lee Fang, an analyst at CGS-CIMB Research, says she is “not too surprised” by the Indonesian government’s decision to keep the palm oil export levy at zero.
She believes that the move will keep CPO exports from Indonesia competitive against Malaysian peers ahead of the peak production season for palm oil in 4Q19, as well as help to keep palm oil inventory in Indonesia at a manageable level.
“Malaysia has announced a similar move to exempt CPO export duty, effective from May 1, 2019, until the end of the year,” Ng says in a Tuesday report.
However, Ng remains “neutral” on the agribusiness sector.
Based on rough estimates, she says the Estate Crop Fund likely has enough funds to subsidise the B20 programme at the crude oil price of US$63 per barrel and CPO price of RM2,089 per tonne, unless the price gap between the two widens significantly.
To recap, Indonesia recently raised its mandatory biodiesel allocation for 2019 to 6.63 million kls from 6.19 million kls. The country intends to raise its biodiesel mandate to B30 by Jan 2020 from B20 currently.
“As at Dec 31, 2018, we gathered that the outstanding balance in the CPO fund was around US$1.44 billion,” adds Ng.
The analyst sees this news as positive for upstream planters with exposure to Indonesia as the exemption of export levy rates could help support CPO prices at current levels.
The research house’s top “add” picks within the sector are First Resources and Wilmar International, with target prices of $1.76 and $4.58, respectively.
The attraction of First Resources lies in its strong output growth prospects due to its young estates and undemanding valuation at 14.8x P/E for FY20, while the research house likes Wilmar for its attractive valuations and plans to unlock value via the listing of its China operations, potentially in 2H19.
CGS-CIMB also likes Malaysian-listed Genting Plantations and has an RM11.00 target price on the stock, as it has a rich land bank and young estates. The group also has one of the youngest estate age profiles among its big-cap peers in Malaysia.
As at 12pm, shares in First Resources are trading flat at $1.61 while shares in Wilmar are trading 2 cents lower at $3.73.
