Indonesia's government said that it will start collecting the CPO levy on 1 July 2015. This will be negative for pure planters, neutral for integrated planters and positive for biodiesel players in Indonesia. Given the current CPO and diesel prices in Indonesia, we think that the estimated US$700m CPO levy fund could subsidise only 2.2m kls of biodiesel. This could drop to 0.9m kl if only 40% of the levy fund is utilised for this purpose against the target biodiesel consumption of 5.5m kls (based on the 15% biodiesel mandate). Thus, we think that enforcement is the critical factor to push up biodiesel demand. We remain Neutral on the sector, with First Resources as our top pick.
The Indonesian government said that it will start collecting the export levy of US$50 per tonne for CPO and US$30 per tonne for processed palm oil on 1 July 2015, instead of today. Coordinating Minister of Economic Affairs Sofyan Djalil said that Indonesia has delayed the implementation date for its planned levy on crude palm oil exports to July 1 from June 15 due to administrative issues. It was also reported that the government has appointed Bayu Krisnamurthi, ex-Deputy Trade Minister, as head of the institution that will collect and manage palm oil export levy, Sofyan Djalil added at a press conference. The export levy, part of the new biodiesel regulations, was announced in late March and signed by President Joko Widodo last month.
What We Think
This will hopefully put to an end the uncertainty over when the CPO levy will be imposed. We continue to view this as a negative development for pure planters in the short term as the local prices for CPO achieved by planters in Indonesia could decline and trade at as much as US$50 per tonne, below international CPO prices, to reflect the new CPO levy.
For Indonesian downstream players, they may be able to enjoy a wider processing margin due to the tax differential between processed palm products and CPO. However, the exact impact on the downstream processors remains unclear as we are not able to establish at this moment whether some of the value-added downstream products will be exempted from the levy. The purpose of the CPO levy is to help fund the 15% biodiesel mandate programme in Indonesia because it is currently uneconomical to produce biodiesel at current CPO prices.
Our view is that if the government can successfully utilise the funds and enforce the 15% biodiesel mandate, this would provide a major positive boost to CPO prices as it could soak up to 5.5m kl of biodiesel. The issue is potentially only 40% of the CPO levy that the agency is expected to collect of at least US$700m will be allocated to biodiesel subsidy, according to Sofyan in an earlier media report. This means only US$280m biodiesel subsidy for the industry, and we estimate that this can only cover 0.9m kl of biodiesel a year, which is much lower than its target. (see Fig 1) As such, enforcement will be critical to ensure that the biodiesel target is met to shore up prices, thus allowing CPO producers to enjoy better prices.
What You Should Do
This news is short-term negative for pure upstream Indonesian planters (AALI, LSIP, Eagle High and Samp Agro) and Malaysian planters with exposure to Indonesia (Sime, KLK, IOI and GentP). It is neutral for integrated palm oil players (SIMP, GGR and First Res) and positive for biodiesel producers (Wilmar and First Res). This policy could be medium-term positive for CPO producers only if the government can significantly boost biodiesel demand to at least 3-4m kls and shore up CPO prices significantly. We maintain our Neutral rating on the sector. (Read Report)
Source : CIMB Research