Indonesia Plantations: New export levy: a blessing in disguise

New export levy: a blessing in disguise

- New progressive palm-oil export levy to be enforced from 10 December.

- Less likely to be permanent, subject to review following the development of palm-oil industries.

- New export levy most likely will be passed on to buyers, thus increasing ASP and CPO prices.

- Raising sector call to Overweight from Neutral with BUY recommendations for AALI IJ, LSIP IJ, and BWPT IJ.

New progressive palm-oil export levy. On 3 December 2020, the government through its regulation No.191/PMK.05/2020, which amended the regulation No.57/PMK.05/2020, put into effect a new palm-oil export levy which will start to be enforced from 10 December 2020. The new regulation will impose a progressive export levy, compared to the previous flat rate export levy, which will lead to a higher export levy along with a higher CPO price. There was no clear explanation given for the new regulation, but since the levy funds will be managed by the Palm Oil Fund Management Agency (BPDPKS), we believe one of the reasons for the new levy is to subsidize the Indonesia biofuel price, which is increasing due to widening spread between the oil price and palm-oil prices.

Right move at the right moment. Under normal circumstances, the increase of the export levy will result in a negative impact to local planters through: 1) lower average sales price (ASP) as the local planters have to absorb most of the levy, which subsequently will lower their margins; 2) lower sales volume as the buyers will search for alternative sellers with lower selling prices; and 3) a combination of both (1) and (2). However, we believe this situation is less likely to happen given the current global limited supply situation amid rising demand for palm-oil products. As the result, we think Indonesia planters will be able to pass on most of the levy to the buyers, which will result to higher CPO prices.

Less likely to be permanent regulation. Although the progressive export levy will be favorable for the Indonesia palm-oil industry, we believe the regulation will not be permanent, given it is subject to review following the development of global palm-oil demand and supply conditions, which could have a negative impact on the implementation of the progressive export levy. Some of the major risks of the progressive export levy are the recovery of Malaysia supply levels and diminished demand for palm-oil products. In all, we still believe the progressive export levy can be implemented and maintained at least until 1H21.

Raising our sector call to OVERWEIGHT. Given the favorable impact of the progressive export levy and the ongoing global palm-oil supply and demand conditions, we set our CPO price assumption for 2021F at USD664 per tonne and raise our sector call from NEUTRAL to OVERWEIGHT. We maintain our BUY calls on AALI IJ, LSIP IJ, and BWPT IJ. We also fine tuning our estimates and Target Prices on AALI IJ, LSIP IJ and BWPT IJ. Risks to our call: 1) faster supply recovery from Malaysia; and 2) lower-than-expected demand recovery.