Indonesia's Domestic Market Obligation U-Turn Positive for CPO Price



Indonesia’s U-turn on its domestic market obligation (DMO) will likely cause a sharp decline in its palm oil exports in the next couple of months.


It could also result in a wider gap between Malaysian and Indonesian palm oil prices due to the hefty tax difference, said Public Investment Bank.


In a note on March 18, it said the move by the Indonesian government is positive for the crude palm oil (CPO) prices as it would result in tighter global palm oil supplies, thus it maintained its “overweight” call on the plantation sector.


On March 17, the Indonesian government announced that it plans to scrap the DMO policy on palm oil exports and replace it with export duty hikes.


The higher CPO export taxes will discourage palm oil producers from exporting their CPO supplies.


The combined ceiling of palm export tax and levy would be raised from US$375 (RM1, 576) per ton to between US$575 and US$675 per ton.


According to Public Investment Bank, based on the current CPO price of RM6, 895 per ton, Indonesian palm oil exporters will be subject to the maximum CPO duty of US$675 per ton.


“Following the latest policy, pure upstream players in Indonesia will be the losers due to the hefty export duties, while local refiners are the winners as they have better bargaining power.


“Meanwhile, based on the current CPO price of RM6,895 per ton, the CPO price differential between Indonesia and Malaysia further widens to US$543 per ton from US$384 per ton,” it said in a note on Friday.


Meanwhile, both RHB Research and CGS-CIMB Securities Sdn Bhd have maintained their “neutral” call on the sector.


“We understand that the rationale for these changes (the revocation of the DMO) stems from the desire to ensure enough cooking oil is supplied to the domestic market, and to effectively raise global CPO prices.


“We also understand that the difference between the current market price and subsidized bulk cooking oil price will now be subsidized by the Biodiesel Fund,” RHB Research said.


As bulk cooking oil consumption in Indonesia is around 2.1 million tons per year, the subsidy could utilize as much as US$1 billion per year (assuming the subsidy is around IDR6, 400 per liter) from the fund, it said.


CGS-CIMB said Indonesian producers’ ability to benefit from the current high CPO price will be affected by the higher export levy, based on its estimates.


“However, this will not significantly affect our financial year 2022/2023-2024 forecast earnings forecasts, which assume CPO price of US$1,146/US$900 per ton,” it said in a note.


To recap, Indonesia introduced the DMO last month, requiring its CPO producers to sell 30% of their committed exports of CPO or palm olein to local buyers at a steep discount to cool down the domestic cooking prices amid soaring CPO prices.


However, after a month, the move seemed to be less effective in bringing down the cooking oil prices as not all plantation players were participating.


Distributors were hoarding cooking oils and cooking oil producers need to buy CPO at the market price due to the supply-demand imbalance on DMO CPO.


Source: www.theedgemarkets.com