Indonesia palm oil levy cut may hit ‘struggling downstream players’

Indonesia’s move to reduce its export levy on palm oil in a bid to boost shipments of the tropical commodity oils could negatively affect Malaysia’s palm oil exports in the coming months.

“The struggling downstream players in Malaysia could face a bigger hit given the growing competition,” according to PublicInvest Research in a report released today.

Indonesia, the world’s biggest grower, is set the crude palm oil levy at 7.5% of the reference price, according to a decree posted on the finance ministry’s website.

The new rule, effective from Sept 21, will cut the duty to $63 per ton from $90 for September. The levy for processed palm products will be between 3% and 6%, reported Bloomberg.

The changes will help the Southeast Asian nation become more competitive than neighboring Malaysia, the second-largest producer. That could add further pressure on benchmark palm oil futures, which have fallen more than 10% in Kuala Lumpur since a high in April.

Indonesia collects an export tax and an additional levy on palm exports. The levy, which is utilized to fund replanting programs and provide biodiesel subsidies, was previously being set every month in US dollars. The reference rate — a weighted average based on palm oil prices – is set every month by the trade ministry to calculate export duties.

In its report, PublicInvest Research noted that the move came on the back of a steep increase of import taxes on various edible oils in India.

“We estimate that the new levy rates will reduce the CPO price gap between Malaysia and Indonesia from RM290/mt to RM181/mt,” it said.

At the point of writing, it said CPO futures closed at RM3,879/mt. It has maintained ‘Neutral’ on the sector outlook with a full-year CPO forecast of RM3,800/mt.

“The new Indonesia’s levy coupled with the hike in India’s import taxes on edible oils could negatively affect Malaysia’s palm oil exports in the coming months as they could potentially lose some market share to their Indonesian counterparts while demand for palm oil products from India could be softer as we believe they would have stocked up ahead of the announcement.

“It will be more challenging for the local refiners, who have been struggling in the past. India is Malaysia’s second largest palm oil importer, accounting for 22% of total imports this year,” it said.

It noted that IOI Corp Bhd, Kuala Lumpur Kepong Bhd (KLK) and SD Guthrie Bhd were the notable Malaysian players that have exposure to the downstream business.

“On the positive note, we may see improved CPO prices from their Indonesian upstream business.

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Tags: export levy, reference price, exports, Indonesia, Malaysia, palm oil, shipments