New Indonesia palm oil levy seen hurting demand, smallholder farms

 

Indonesia will impose higher levies on crude palm oil (CPO) starting Dec. 10, an official document showed on Thursday, a move that could impact demand next year as it seeks to generate funds for its ambitious palm-based biodiesel programme.

Export levies will be raised to a progressive system of $55-$255 per tonne of CPO, depending on price levels. It previously imposed a flat $55 levy on CPO regardless of price.

The new regulation stipulates that if CPO reference price is $670 per tonne or below, the levy imposed will be $55 per tonne. It will increase by $15 for every $25 price hike in CPO.

The levy for CPO in December will be at $180 per tonne starting Dec. 10 as reference price was set at around $870, an official at the oil palm fund agency told Reuters.

The measures are seen as a fundraiser to help subsidise Indonesia&rsquo s biodiesel programme, which requires diesel to be blended with 30% bio content (B30) to maximise domestic use of the edible oil.

A slump in fuel prices this year has made it less economical for biodiesel and longstanding plans to increase the bio content to 40% (B40) have been delayed due to funding issues.

The levies could impact demand next year for the versatile oil, which is found in a variety of consumer products, from potato chips to soap, as consumers look at cheaper alternatives.

B.V. Mehta, executive director of the Solvent Extractors&rsquo Association of India, said demand there was not likely to improve.

India is the world&rsquo s biggest importer of palm oil. Palm prices have already been increasing this year due to a supply crunch and rainy weather.

&ldquo India is a very price-sensitive market, the current high prices are likely to reduce demand further,&rdquo Mehta told a virtual conference on Thursday.

The higher levy is also not welcomed by smallholder farmers who say that it only benefits bigger oil producers who supply feedstock for Indonesia&rsquo s biodiesel.

&ldquo This policy is misguided,&rdquo Mansuetus Darto, secretary-general of Indonesia&rsquo s smallholder farmer association said.

&ldquo It only wants to pursue the target of stepping up to B40 and hurting small farmers.&rdquo

The market however, reacted positively, with the benchmark palm oil contract for February delivery on the Bursa Malaysia Derivatives Exchange rising 0.4% to 3,328 ringgit ($817.09) per tonne on the news.
Source: Reuters (Reporting by Bernadette Christina Munthe and Fathin Ungku Editing by Martin Petty)

 

Agribusiness players are generally positive on crude palm oil (CPO) prices for the remainder of the year with the current rally set to ease with improved supply in 1H21F, note CGS-CIMB analysts Ivy Ng and Nagulan Ravi in an Oct 29 note. 

 

Ng and Ravi are maintaining their &lsquo neutral&rsquo call on the agribusiness sector, and recommend &lsquo add&rsquo on three highlighted companies: First Resources Ltd, Genting Plantations and Wilmar International, with target prices $1.80, RM10.70 and $5.53 respectively.

 

CGS-CIMB was both speaker and participant of the recently concluded Virtual Palm and Lauric Oils Price Outlook Conference & Exhibition (POC) 2020, held in Kuala Lumpur on Oct 27 and 28 and attended by some 1,750 registered participants.

&ldquo Speakers concurred that CPO prices are likely to stay around RM2,500 to RM3,000 ($656.12 to $984.19) per tonne for the rest of the year due to tight palm oil and other edible oils stocks, concerns over the La Nina impact on edible oil supplies, and labour constraints in Malaysia, which could negatively impact FFB yields from the estates in the coming months,&rdquo note Ng and Ravi. 

 

CPO price rose to a new year-to-date high of RM3,185 per tonne on Oct 27, on concerns of lower-than-expected palm oil supply from Malaysia, note the analysts.

 

Ng and Ravi also note from the conference that the recent CPO price rally was driven by supply disruptions in key edible oils as well as palm oil producing regions. 

 

Palm oil output from Malaysia and Indonesia was adversely affected by lower rainfalls, reduced fertiliser application, shortages of workers, and movement restrictions in some palm oil regions. 

 

The lower-than-expected supply of other edible oils (in particular sun and rapeseed oils) had also helped induce the sharp rise in vegetable oil prices starting June, which had a spillover effect onto CPO prices. 

 

&ldquo Although the restricted movements imposed in most countries had caused a certain level of demand destruction on edible oils, the reduction in palm oil exports was short-lived, as key importing countries underwent restocking activities, while reduced availability of yellow greases and animal fats have led some biodiesel producers to switch their feedstocks to vegetable oils,&rdquo say Ng and Ravi. 

 

The year ahead

 

For 2021F, most speakers agree that palm oil supply will improve in 1H21F, say Ng and Ravi, citing the rainy season.

 

&ldquo Several speakers indicated their concerns that the current zero export tax for CPO in Malaysia may not be extended beyond Dec 31, 2020, and this could negatively impact CPO exports to India, while Indonesia could raise their CPO export levy to support its B30 mandate,&rdquo say Ng and Ravi.

 

Other potential factors that could derail the CPO price rally include lower biodiesel usage in Indonesia due to insufficient CPO levy and government funds for the mandate, lower crude oil prices, favourable weather conditions and changes in government policies that cause demand destruction and favour supply growth in the edible oils market.

 

CGD-CIMB analysts&rsquo preferred picks in Malaysia are Genting Plantation, Ta Ann and Hap Seng Plantations, with regional picks Wilmar and First Resources.

The attraction of First Resources lies in its strong output growth prospects, given its young estates and undemanding valuation at 14.1x P/E for FY20F, note Ng and Ravi, while they prefer Genting Plantations for its rich land bank and young estates. The group has one of the youngest estate age profiles among its big-cap peers in Malaysia.

 

Finally, the analysts like Wilmar International due to its attractive valuations and growth potentials in China post listing of YKA. Key catalysts are better-than-expected earnings, due to strong CPO prices and crushing activities, a potential special dividend payout and rising interest in Wilmar as a cheaper and more liquid entry into YKA.

 

First Resources, Golden Agri and Bumitama Agri

 

Meanwhile, RHB has upgraded First Resources to &lsquo buy&rsquo with a target price of $1.45. &ldquo We revise our 2020/2021 CPO price assumptions to reflect slightly higher y-o-y prices of RM2,650/tonne in 2021 from 2020&rsquo s RM2,600/tonne. We believe First Resources&rsquo valuations have fallen to attractive levels, trading at 10.4x 2021F P/E &ndash below its 13x historical mean,&rdquo say RHB in a Nov 2 note. 

RHB notes that CPO prices have been very volatile of late. &ldquo Besides the usual supply and demand dynamics, we believe there are three major swing factors that determine 2020 CPO price direction: Soybean prices (tying in with weather issues), crude oil prices (tying in with Covid-19), and Malaysia&rsquo s labour issues.&rdquo

 

RHB raised its CPO price assumptions to RM2,600/tonne for 2020 from RM2,400, and RM2,650/tonne for 2021 from RM2,500. &ldquo Our forecasts have been raised by 15-16% for FY20-21 and by 9.5% for FY22.&rdquo

 

On Golden Agri, RHB is maintaining its &lsquo sell&rsquo call with a target price of 13 cents. &ldquo Despite the earnings increase, we keep our SGD0.13 TP based on an unchanged EV/ha of USD2,200 for the plantation wing and 0.5x P/Book for the downstream unit. Golden Agri&rsquo s valuations remain prohibitive, trading at > 30x 2021F P/E,&rdquo says RHB in a Nov 2 note. 

 

On Bumitama Agri, RHB is maintaining its &lsquo buy&rsquo call with a target price of 65 cents. &ldquo Despite the increase in earnings, we maintain our SGD0.65 TP, based on a lower 10x 2021F earnings from 11x. This is based on updated 5-year forward P/Es. BAL is trading at 7x 2021F P/E, at a large discount to its peers and historical P/E&hellip Bumitama Agri&rsquo s valuations are unjustified,&rdquo says RHB in a Nov 2 note.