Indonesia’s plan to raise the biodiesel mandate to 35% (B35) from 30% will boost sentiment but may not effectively lower stocks in the near term, said CGS-CIMB Research analysts Ivy Ng Lee Fang, Nagulan Ravi and Peter Sutedja.
The B35 policy — effective on July 20 — is aimed at reducing palm oil inventories in Indonesia, which have been building up following a three-week export ban from April 28 to May 23. Since the lifting of the export ban, crude palm oil (CPO) price in Indonesia has fallen by 48% to IDR7,288 (68 cents) per kg as at July 8.
In their July 11 note, the analysts said the policy will help raise domestic palm oil usage, reduce stocks and improve domestic prices sentiment. However, it will take time to resolve current high stocks as they estimate the additional absorption rate of CPO is at 134,000 tonnes per month.
“To put things in perspective, we estimate palm oil stocks in Indonesia to be at 8 million to 8.5 million tonnes as at end-June versus end April (beginning of export ban) of 6.1 tonnes,” the analysts add.
Indonesia senior energy ministry official Dadan Kusdiana said the mandate increase would create additional demand for 727,804 kiloliters of the palm oil fuel this year, taking the full year consumption to 10.88 million kiloliters. The country’s biodiesel consumption from January to July 2022 was estimated at 5.78 million kilo liters.
The government has also pushed other policies to reduce inventories in Indonesia, including increasing the export rights multiplication factor to 7x of their Domestic Market Obligation starting July 1, 2021 from 5x. This is aimed at providing better export visibility to exporters to shore up exports and free up storage tanks in Indonesia, the analysts highlighted.
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To improve domestic palm oil prices, it was reported that the Indonesian authorities are also considering lowering the palm oil export levy to spur exports and asking palm oil producers to buy fresh fruit bunches from farmers at a minimum price of IDR1,600 per kg.
CGS-CIMB analysts view the plans to reduce the export levy as positive for Indonesian CPO prices in the medium term as it reduces the tax burden which appears to currently be borne by Indonesian farmers.
The combined export tax and levy in July stood at US$488 per tonne. This is at the maximum threshold level and based on the reference price of US$1,688 per tonne for July versus spot CPO price in Rotterdam of US$1,220 per tonne as at July 7.
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The analysts maintain “neutral” on the sector, noting that share prices of planters have reacted negatively to the falling CPO price.
“We see scope for CPO price to rebound as Indonesia’s more aggressive policies to lower stocks could lead to future unintended shortfalls in supply,” they add.
Wilmar International is one of CGS-CIMB’s top picks in the region. The analysts’ target price for Wilmar, Golden Agri and First Resources are $5.69, 30 cents and $2.10 respectively.
As at 11.57am, shares in Wilmar, Golden Agri and First Resources are trading at $4.08, 26 cents and $1.47 respectively.
