Strategy Note /

Wilmar, IOI and KLK are winners from Indonesia's ban on palm oil exports

  • Indonesia has banned palm oil exports in its most radical case of food protectionism in recent times

  • Indonesia’s production is three times that of domestic consumption. The Malaysian palm oil producers can benefit

  • There could be a shift to soybean oil, which would be positive for Wilmar. We reiterate our Buy recommendation on Wilmar

Wilmar, IOI and KLK are winners from Indonesia's ban on palm oil exports
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
2 May 2022
Published byTellimer Research

Last week, Indonesia banned palm oil exports. This move is designed to ease the cost of living for the almost 280mn people living in the archipelago, in the face of rising food prices.

Using the S&P GSCI Agriculture Index as a measure – the components of which are wheat, cocoa, coffee, corn, cotton, soybeans and sugar – food prices have hit their highest level in a decade. However, the fear is that prices could rise further, as they are still well below the severe spike in the 1970s.

Indonesia's move is the latest in a series of measures it has taken this year to lower cooking oil prices, having already capped retail prices and subsidised consumers.

The country produces c50mn tonnes of the world’s 74mn tonnes of palm oil, and almost two-thirds of its production is exported.

We see three implications for the edible oil stocks:

  1. The move could lead to a glut of palm oil in Indonesia. There is inadequate storage to hold the excessive supply that could accumulate. The ban does not apply in Malaysia, which is the world’s second-largest palm oil producer, and importers may turn to Malaysian palm companies such as IOI, KLK and Sime Darby.

  2. Demand for soybean oil could increase, as global palm oil supply will be restricted by the ban. Soybean oil is the second largest edible oil after palm oil. At present, the ratio of soybean oil in edible oil crush is 43%, but the ban could cause this could rise to over 50%.

    An improvement in soybean oil crush margin would be positive for Wilmar International. Wilmar is the largest soybean processor in Asia, and we reiterate our Buy recommendation as it is a diversified beneficiary of the global food price spike. Other beneficiaries could include international soybean processors like ADM, Bunge and Grain Corp.

  3. Investors should be wary of going long Indonesian palm oil producers, such as Golden Agri, Asta Agro Lestari, and First Resources. Though palm oil prices are elevated, these companies could carry unsold inventory and incur inventory losses due to the ban.