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Indonesia’s Export Levy Revision to Pressure Crude Palm Oil Prices

Cuts to Indonesia’s export levies are likely to encourage crude palm oil (CPO) exports in 2H21, causing Malaysian benchmark prices to weaken, Fitch Ratings says.

Price realisations for domestic producers should improve in the next few months, as the discount from the benchmark price will narrow. However, we do not see any meaningful long-term benefit from the export levy revision, as we expect CPO prices to be significantly lower from 4Q21, limiting the cut in applicable levy rates.

Indonesia has made multiple revisions to its levy structure in the last three years and we think the latest rates may be adjusted further in response to CPO and crude oil price movements to allow it to collect sufficient funds to subsidise biodiesel consumption in the country.

The new progressive export levy structure for palm oil exports will come into effect from 2 July 2021. The maximum levy on CPO exports will be USD175/tonne (t) when government-determined reference prices are above USD1,000/t. This implies a cut of USD80/t from the rate that has applied since 10 December 2020. The cuts at lower reference CPO price levels decrease steadily, with the lowest levy rate of USD55/t remaining unchanged. That rate will apply if reference prices are at or below USD750/t, which we think will be the case if Malaysian benchmark prices are around USD600/t.

The levies on refined palm oil products have also been cut by up to around USD70/t if CPO reference prices are above USD1,000/t. The applicable rates for exports of refined products remain lower than CPO. Indonesia also imposes an export tax on palm oil products, in addition to the export levies. Export tax rates remain unchanged, starting at USD3/t when the reference CPO price is over USD750/t and increasing with price thereafter.

The cut in export levies is likely to encourage higher exports from Indonesia at the current Malaysian CPO benchmark price level of around USD900/t and improve price realisations for domestic producers in the next few months. In addition to better realisations for exports, after netting off export levy and tax, palm oil companies should also benefit from higher domestic prices, which are usually on par with export realisations.

However, lower export levies are likely to add to the pressure on CPO prices from improving industry output. We assume Malaysian benchmark prices will be around USD600/t by 4Q21. Global palm oil output could jump by 3.2 million t in the 2021-2022 marketing year, compared with 0.5 million t growth in 2020-2021, according to estimates by the US Department of Agriculture.

The latest revision in the export levy structure should not result in a significant change in net price realisations for Indonesian producers, based on our assumption of average benchmark prices of USD550/t in 2022 and USD600/t thereafter. At these prices, the applicable levy rate for CPO should be USD55/t from 2022 as per the new regulation, compared with our estimate of USD55-60/t under the previous structure.

We estimate that collection from export levies, which are used to subsidise biodiesel consumption, will be sufficient to cater to the official 2021 target of 9.2 million kilolitres, despite being potentially lower from July. However, the government may need to revise the levy structure in the next year or two to support the biodiesel programme based on our long-term benchmark CPO price assumption of USD600/t and Brent crude oil price assumption of USD53/barrel.
Source: Fitch Ratings

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