Hellenic shipping news (18/12/2018) - The benefit to Indonesian producers from the government’s relaxation of the export levy structure for crude palm oil (CPO) and refined palm oil products is likely to be limited because we expect CPO prices to improve, Fitch Ratings says. Upstream-focused companies are likely to benefit more from the relaxation compared with those with meaningful refining capacities, until refined product prices adjust to the new levy structure.

The new regulations, effective 4 December 2018, allow palm oil exporters to pay zero levy when the CPO reference price is below USD570/tonne. The reference price set for December is USD549/tonne. The levies will increase to USD10-25/tonne when the reference price rises to USD570-619/tonne, and further to the USD20-50/tonne when price improves to above USD619/tonne. CPO will attract the highest levy, while levies for refined products will be lower. Under the previous regime in place since 2015, Indonesia levied USD20-50/tonne on the export of palm oil products, regardless of the price level. By reducing the levies, the government expects to provide some relief to Indonesian producers during periods of low benchmark prices and enable them to be more competitive in the international market.

The monthly reference price for CPO is set by the ministry for trade at the end of the preceding month and is based on an average of recent prices in Indonesia (60% weightage), Malaysia (20%) and Rotterdam (20%). The reference price includes insurance and freight charges and has been around USD70/tonne higher than corresponding value for the Malaysian free-on-board spot CPO index, which Fitch uses for its price assumptions.

We believe the changes will provide limited support to producers’ EBITDA as we expect CPO prices to improve from current low levels. Our price assumption for the Malaysian benchmark for 2019 is USD600/tonne (year to date 2018: USD560/tonne), which is based on mid-cycle industry conditions and factors in market expectations of a better demand-supply balance. Latest projections by the U.S. Department of Agriculture indicate palm oil supply growth slowing by around 2 million tonnes in the year ending October 2019 and lagging demand growth by around 1.5 million tonnes, which should help to reduce the oversupply in the market.

However, until CPO prices improve, the export levy cut will allow better net price realisations for producers. Most sales by Indonesian producers are in the domestic market and not subject to export levies; however, the discount on local prices relative to international benchmarks was similar to the levies. In addition, the discount of domestic CPO prices was higher than that for refined products. With the current zero export levy, domestic prices should adjust upwards, although gains for producers may be partly offset should additional exports from Indonesian producers put pressure on international prices.

We think upstream-focused players such as PT Sawit Sumbermas Sarana Tbk (B+/Stable/A(idn)) and PT Astra Agro Lestari Tbk stand to benefit more than companies such as Golden Agri-Resources Ltd and PT Tunas Baru Lampung Tbk (B+/Stable/A(idn)), which have substantial refining operations. This is because margins earned by refining CPO are likely to be affected as the gap in export levy for CPO and refined products has been eliminated, until product prices adjust.
Source: Fitch Ratings, Inc.