Indonesia raises their export tax, 26 June 2008

Plantations
Indonesia ups its CPO export tax
ivy.ng@cimb.com

Monthly palm oil export tax and base price raised… Indonesia will raise the export tax on crude palm oil from 15% to 20% in July, in line with rising international prices of the commodity, according to a senior government official. The base export price for CPO will also be raised from $1,105 per tonne in June to US$1,144 in July.

… due to higher international CPO price. The export tax will be higher as CPO cif prices in Rotterdam, which Indonesia uses as a benchmark for calculating its export tax rates, averaged $1,220 per tonne in June, said Diah Maulida, director general of foreign trade at the trade ministry. Under a progressive tax system, Indonesia imposes a 20% export tax on CPO if prices in Rotterdam are within the range of US$1,200-1,300/tonne.

Comments
Not a surprise. This news and its timing are not unexpected for the following reasons:(1) the government traditionally announces the new monthly export tax during the last week of the month, (2) the existing progressive export tax schedule for Indonesia CPO is well-known to the market and was implemented in Feb 08 (see Figure 1); and (3)the international CPO price has been creeping up over the past month and is hovering above US$1,200 per tonne, where the next export tax threshold lies (see Figure 2).

How the export tax is determined? We understand that the government fixed the monthly export tax rate based on the movement of the CPO price in the previous month. The CPO price in Rotterdam, which Indonesia uses as a benchmark for calculating its export tax rates, has averaged US$1,220/tonne so far in the month of June. This price level falls under the new tax bracket, i.e. category 2 in Figure 1. This clearly explains the rationale behind the increase in export tax rate for the month of July. The base export price of US$1,144 per tonne stands at a discount of around US$76 per tonne to the average price of US$1,220 per tonne. We believe the discount takes into account the cost, insurance and freight charges for the palm products.





Not the highest YTD export tax. Data we have collated indicate that this is not the highest palm oil export tax value levied by the Indonesian government. In April 08, the government imposed an export tax rate of 20% on a CPO base export price of US$1,182 per tonne, which translates into an export tax of US$238.4 per tonne. This is higher than the US$228.8 per tonne export tax set for July.



Potential impact of higher export tax Impact on CPO prices. We find that over the past year, part of the higher Indonesian export taxes has been passed to consumers through higher international CPO prices due to tight global edible oil supplies. Yesterday, CPO futures traded on MDEX rose by RM30-50 per tonne, possibly in reaction to this news.

Impact on Malaysian planters. If international CPO prices appreciated solely on the back of the higher export taxes, Malaysian planters stand to gain most as they will be able to enjoy higher CPO prices without a corresponding increase in costs, i.e. the higher export tax which is applicable only to those with Indonesian estates.

Impact on Indonesian planters. The higher export tax for July is neutral to slightly negative for the Indonesian planters. It will be neutral for Indonesian planters if the international CPO price for July rises enough to offset the increase in export tax. The impact will be negative if the increase in price cannot cover the higher taxes.

Valuation and recommendation

Maintaining earnings forecasts. We are keeping to our earnings forecasts for all the planters with exposure to Indonesia as we have already factored the new export tax regime in our projections. Also, we expect the higher taxes to be covered by the better-than-expected CPO price achieved YTD. As an illustration, we are currently projecting an export tax rate of 12% based on our CPO price forecast of US$1,105 per tonne. In the month of June, CPO price averaged US$1,220 per tonne, which translates into additional revenue of US$115 per tonne. However, this has resulted in a higher export tax of 20%, higher than our expectation of 12% on the CPO price assumed, which means an additional export tax cost of US$112 per tonne for Indonesian planters against an increase in revenue of US$115 per tonne. This has no impact on planters with Malaysian estates as they are subject to Malaysia’s windfall and sales tax system (see Figure 4).

Maintain OVERWEIGHT stance and preference for Malaysian planters. Under the current progressive export tax system in Indonesia, planters with Indonesian estate swill not benefit from higher CPO price and may see a marginal negative impact within the CPO price range of US$1,100-1,300 per tonne as any upside from selling price will be capped by the higher export tax rate applicable under the progressive tax system. There is also the concern that the Indonesian government may extend the maximum export tax rate if CPO price surges above US$1,300 per tonne. This will not be the first time it resorts to this.

Although some Malaysian plantation stocks may trade at higher P/E valuations, we continue to favour the Malaysian planters over their Indonesian counterparts given their higher earnings leverage to any upward revision to our current CPO price assumption of US$1,105 per tonne (fob). There is no change to our recommendations. Among Malaysia’s big-cap planters, we continue to favour IOI Corp and Sime Darby. Our top pick in Singapore is Wilmar and in Indonesia, we favour Astra Agro. We maintain our OVERWEIGHT call on the sector, with the key catalysts being higher CPO price, potential M&A and higher crude oil price.


author comment : please note the word "sabah tax" should replaced by "sarawak tax" under sarawak row.



filed: Indonesia raises their export tax, 26 June 2008.pdf

a comment: i don't think indonesia make bigger hurdle in long term, because edible oil in small package no restrict under export tax bracket, as well as india import duty on edible oil is slightly higher than on cpo ,indonesian prefer output edible oil to cpo , and the impact of by-product such as stearin and fatty acid is minor. i am not very sure , please investigate the monthly variance from indonesia custom.