Plantations - What if Indonesia cuts reference price for CPO export tax?
Recommendation: Neutral
The Indonesian government is reportedly mulling a cut in the threshold price used to determine its monthly export tax for CPO. We think the aim is to help spur the implementation of the biodiesel mandate in Indonesia by lowering domestic CPO prices to reduce biodiesel producers’ costs and using the export tax revenue to fund the biodiesel subsidy. In the short term, such a move would be negative for upstream producers, positive for downstream producers and neutral for integrated palm oil players in Indonesia. We maintain our Neutral rating and First Res, AALI and SIMP as our top pick.
What Happened
The Indonesian government is considering lowering the crude palm oil (CPO) reference price used in calculating the monthly export tax for palm oil, Trade Ministry’s head of trade policy research and development, Tjahya Widayanti said. “To fulfill domestic needs, we need to change export taxes and this is under discussion. We will lower the threshold,” she added. At present, the government charges export taxes on CPO shipments when the monthly CPO price averages above US$750 a tonne. The Trade Ministry’s director general of foreign trade, Partogi Pangaribuan said that the threshold might be cut to US$500-600 per tonne. Meanwhile, Derom Bangun, Indonesian Palm Oil Board chairman said that the government would like to lower the threshold but no timeline had been given.
What We Think
This is the first time that the Indonesian ministry is hinting at the possibility of changing the export tax structure for CPO. Based on our records, the last time the government made a significant change to the regulation on export taxes was in September 2011. If this is implemented, it is likely to be negative for the pure upstream palm oil players, positive for downstream players and neutral for the integrated palm oil players in Indonesia. This is because a lowering of the price threshold for CPO export tax to US$500-600 per tonne could result in the CPO price in Indonesia being much lower than the international CPO price (the difference being the export tax) and this would dampen the earnings of upstream players. Downstream players (refiners, oleochemical, specialty fats and biodiesel) are likely beneficiaries of this move as they would be able to enjoy a wider processing margin due to the export tax differential between processed palm products and CPO. This potential move could also be negative for downstream palm oil players in Malaysia because the export tax structure for Malaysian refined palm products could be less competitive against Indonesia, following the change. We think that the move to lower the export tax reference rate is also intended to help the implementation of mandatory biodiesel blending. It was reported that one of the proposals mooted to support the biodiesel mandate is to regulate CPO price in the domestic market to lower biodiesel producers’ production costs and use the income from the CPO export taxes to fund the biodiesel subsidy.
What You Should Do
It is too early to assess the earnings impact on the players until the new export tax structure is revealed. Our preliminary assessment is that it would be negative for upstream players (AALI, Lon Sum, Samp Agro, Eagle High, GenP), positive for downstream players (Wilmar) and relatively neutral for the rest which are integrated players in Indonesia.
Source: CIMB Daybreak - 20 March 2015
Recommendation: Neutral
The Indonesian government is reportedly mulling a cut in the threshold price used to determine its monthly export tax for CPO. We think the aim is to help spur the implementation of the biodiesel mandate in Indonesia by lowering domestic CPO prices to reduce biodiesel producers’ costs and using the export tax revenue to fund the biodiesel subsidy. In the short term, such a move would be negative for upstream producers, positive for downstream producers and neutral for integrated palm oil players in Indonesia. We maintain our Neutral rating and First Res, AALI and SIMP as our top pick.
What Happened
The Indonesian government is considering lowering the crude palm oil (CPO) reference price used in calculating the monthly export tax for palm oil, Trade Ministry’s head of trade policy research and development, Tjahya Widayanti said. “To fulfill domestic needs, we need to change export taxes and this is under discussion. We will lower the threshold,” she added. At present, the government charges export taxes on CPO shipments when the monthly CPO price averages above US$750 a tonne. The Trade Ministry’s director general of foreign trade, Partogi Pangaribuan said that the threshold might be cut to US$500-600 per tonne. Meanwhile, Derom Bangun, Indonesian Palm Oil Board chairman said that the government would like to lower the threshold but no timeline had been given.
What We Think
This is the first time that the Indonesian ministry is hinting at the possibility of changing the export tax structure for CPO. Based on our records, the last time the government made a significant change to the regulation on export taxes was in September 2011. If this is implemented, it is likely to be negative for the pure upstream palm oil players, positive for downstream players and neutral for the integrated palm oil players in Indonesia. This is because a lowering of the price threshold for CPO export tax to US$500-600 per tonne could result in the CPO price in Indonesia being much lower than the international CPO price (the difference being the export tax) and this would dampen the earnings of upstream players. Downstream players (refiners, oleochemical, specialty fats and biodiesel) are likely beneficiaries of this move as they would be able to enjoy a wider processing margin due to the export tax differential between processed palm products and CPO. This potential move could also be negative for downstream palm oil players in Malaysia because the export tax structure for Malaysian refined palm products could be less competitive against Indonesia, following the change. We think that the move to lower the export tax reference rate is also intended to help the implementation of mandatory biodiesel blending. It was reported that one of the proposals mooted to support the biodiesel mandate is to regulate CPO price in the domestic market to lower biodiesel producers’ production costs and use the income from the CPO export taxes to fund the biodiesel subsidy.
What You Should Do
It is too early to assess the earnings impact on the players until the new export tax structure is revealed. Our preliminary assessment is that it would be negative for upstream players (AALI, Lon Sum, Samp Agro, Eagle High, GenP), positive for downstream players (Wilmar) and relatively neutral for the rest which are integrated players in Indonesia.
Source: CIMB Daybreak - 20 March 2015
