For the first time since October 2014, Indonesia's palm oil exporters will have to pay an export tax on crude palm oil (CPO) shipments as the government's reference CPO price was set at USD $754.10 per ton in May (the level of USD $750 per ton separates taxable from non-taxable shipments). The Indonesian government announced that it will impose a USD $3 per ton tax on CPO exports in May 2016. Palm oil is the key foreign exchange earner for Indonesia in terms of non-mining export products. The country is the world's largest producer and exporter of CPO, followed by Malaysia.
When the Indonesian government's reference CPO price exceeds USD $750 per ton, then a progressive tax rate kicks in. This rate ranges between USD $3 to $200 per ton.
Some analysts are concerned that the (re)introduction of the palm oil export tax in May 2016 will curtail Indonesia's palm oil shipments, hence putting more pressure on Indonesia's trade balance (which has been contracting for 1.5 years), as importers may turn to cheaper palm oil in Malaysia instead. Contrary to earlier reports, the USD $50 per ton export levy on CPO and USD $30 per ton export levy on processed palm oil products will remain in place after the export tax kicks back in next month. This may reduce foreign demand for Indonesian CPO while it also makes it more attractive for Indonesian palm oil companies to supply the domestic market.
International crude palm oil prices have been improving in 2016, primarily on curbed output in Indonesia and Malaysia (due to El Nino-inflicted droughts) as well as stable palm oil demand (due to Indonesia's biodiesel program). Output in Malaysia touched an 18-month low of 1.04 million tons in February 2016. Meanwhile, output in Indonesia is estimated to drop by about 5 - 10 percent to 31 million tons in 2016. This would be the first annual decline in Indonesia's CPO production in 15 years. Global credit rating firm Fitch Ratings said it expects the palm oil price to reach the range of USD $650 - $700 per ton in 2016. Although the link is not perfect, there is a correlation between palm oil prices and the crude oil price (because CPO is used for the production of biodiesel), implying rising crude oil prices would support higher palm oil prices. Fitch added that higher palm oil prices are credit positive for palm oil producers as their cash flow improves.
Indonesian Palm Oil Production and Export Statistics:
(in USD billion)
¹ indicates forecast
Sources: Indonesian Palm Oil Producers Association (Gapki) & Indonesian Ministry of Agriculture